LETFs: Dual Strategies for Smarter Leverage

[With Backtests] Two leveraged ETF backtest illustrations and their risks

Reviewed and updated 25 July 2026

Hello!

This post dives deeper into leveraged ETFs (LETFs) as a follow-up to an earlier post on volatility decay and optimal leverage. I’ll break down two LETF trading strategies I encountered in research, alongside a paper and several practitioner sources.

The figures below show specific historical backtests. Results will vary with rebalancing, fees, financing, taxes, and contribution timing.

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Hedgefundie’s Excellent Adventure (HFEA)

I’ll also paste the links to the original posts on the Bogleheads forum, for those who want to dive deeper into the strategy and its origins:

• Original Introduction to the Strategy

• 1955-2018 Backtest with Data

Because some images no longer load in the original forum posts, I’ll summarize the HFEA strategy, show the historical backtests, and discuss its risks.

HFEA Summary

Hedgefundie’s Excellent Adventure (HFEA) is a leveraged twist on the traditional 60/40 portfolio (the long-standing mix of stocks and bonds designed for balanced risk and growth).

The logic behind 60/40 is simple: stocks provide long-term appreciation, while bonds act as a stabilizer, reducing drawdowns and smoothing returns. But for investors willing to take on more risk, the question was: why not apply leverage to boost expected returns while keeping diversification intact?

HFEA does exactly that, using UPRO (3x S&P 500) and TMF (3x long-term Treasuries) to create a leveraged 60/40 allocation. The goal was to capture the benefits of diversification while amplifying the return potential. By borrowing at low rates (implicitly through the ETF structure), investors could achieve equity-like returns with a bond component that, in theory, provided downside protection. The appeal for this strategy is in higher expected returns without only increasing stock exposure.

For a time, the strategy worked very well. Declining interest rates helped Treasuries hedge stock market downturns, and leverage magnified gains during bull markets.

But this approach depends on negative stock-bond correlation and stable or falling rates. When those conditions changed in 2022 (rates surged, bonds collapsed, and stocks remained volatile) HFEA struggled. Without the protective role of Treasuries, the leveraged exposure became a concentrated bet rather than a diversified portfolio.

Some investors adjusted by reducing bond exposure or exploring alternative hedging methods, but the original concept relied on macroeconomic conditions that had shifted by the time of publication. The surviving historical backtests cannot establish whether the stock-bond relationship will provide the same protection in later periods.