Leveraged ETF Rotation: 18% CAGR — Does It Beat SPY?

Welcome back to Avalon QuantBrief, where we dissect high-performing quantitative strategies for modern markets. Today, we are backtesting and optimizing one of the most famous momentum frameworks in finance: Frank Grossmann’s 2015 Leveraged ETF Rotation strategy. By systematically rotating out of danger, this approach tames the volatility decay of triple-leveraged assets to deliver institutional-grade returns.

Backtest Summary (2017–present)

📈 CAGR: 18.1%
📉 Max Drawdown: -25.4%
⚡ Sharpe Ratio: 0.82
💰 Total Return: 425.5%
🎯 Universe: TQQQ, UPRO, SPXL, TNA, SOXL, TLT, GLD, SHY

The Core Mechanics of Grossmann's Strategy

Grossmann's original model rotates through high-growth leveraged ETFs like TQQQ, UPRO, and SOXL, while utilizing TLT, GLD, and SHY for safety. The system relies on a dual-indicator regime filter, triggering a bull market only when the SPY is above its 200-day moving average and the VIX is below 25. If either condition fails, the strategy executes an emergency exit to defensive assets to protect capital from catastrophic drawdowns.

Upgrading the Framework for Modern Regimes

To adapt to today's faster-moving markets, we introduced three key enhancements to the original framework. First, we implemented a volatility-adjusted trend ranking to penalize decaying assets during choppy periods, alongside an optimized rapid-exit regime filter. Finally, instead of relying on a fixed defensive asset, our variation dynamically selects the strongest safe haven among treasury, gold, and cash proxies.

Analyzing the Backtest Performance

Testing our adapted version from 2017 to the present yields highly competitive results, achieving a Compound Annual Growth Rate (CAGR) of 18.1% and a total return of 425.5%. Remarkably, the maximum drawdown was restricted to just -25.4%, which is exceptionally low for a strategy utilizing triple-leveraged ETFs. This combination of high returns and controlled risk results in a highly robust Sharpe ratio of 0.82.

Equity Curve and Drawdown Protection

The equity curve highlights the power of our dual-indicator regime filter, which successfully rotated the portfolio into safe havens during the 2020 crash and the 2022 bear market. By avoiding the devastating 70% drawdowns typical of buy-and-hold leveraged strategies, the portfolio maintains a smooth, stair-step upward trajectory. This proves that mitigating large losses is the most effective way to compound wealth over the long term.

The Final Verdict on Leveraged Rotation

Ultimately, the Tactical Leveraged Trend Rotation strategy proves to be a highly viable approach for active quantitative traders. By combining momentum with strict volatility-based regime filters, our adapted version successfully tames the wild swings of leveraged ETFs. Subscribe to Avalon QuantBrief and join our community below to see how we integrate these exact rules into our live trading portfolios.

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⚠️ Not financial advice. This is for educational purposes only. Always do your own research before investing.

📄 Original paper: Leveraged ETFs for the Long Run: A Simple Strategy to Beat the S&P 500