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My first experience investing, like most of us, was investing and saving small amounts. I had a strong understanding of math and risk, and after running the numbers I quickly realized that the returns I was getting from my funds were not going to be enough to get me on track for the retirement I wanted. That was me discovering the number-one risk that we all face when planning for retirement – that we don’t have enough to live the retirement we want.
A paper published by the Center for Retirement Research of Boston College (How Well do Retirees Asses the Risks they face in Retirement?) states the number-one retirement risk is longevity risk – “the risk of living longer than expected and exhausting one’s resources.” Many other think tanks have come to the same conclusion.
That’s when I discovered leverage, a word that scared me a little bit at first. Sure, with leverage there is potential for higher returns, but also for steeper losses. But with moderate leverage, anywhere between 1.1 and 1.5 times, you can still get a boosted return but without extreme volatility. And if that moderate leverage is provided in an exchange-trade fund (ETF) with a rules-based trading algorithm that reduces volatility and minimizes losses, there is a good potential to come out ahead long-term.
The best way to access moderate leverage is through an ETF. Leveraging through a bank, other financial institution, or with margin will cost you. Here’s an example. $10,000 invested in the S&P 500 over the past 10 years, with a 1.3 times levered ETF, would have neted you over 15% more than if you had borrowed 30% of your investment and invested $13,000. That’s because you must pay regular interest on your loan and eventually pay back the borrowed amount to the bank. With a levered ETF there are no borrowing costs.
The following table shows a comparison of what a $10,000 investment looks like after 10 years in a non-levered ETF, a 1.3 times levered ETF, and borrowing 30% of your investment from a bank.
Ultimately, we are all trying to grow our investments. Similarly, if you are or were running a business, you want it to grow, and the best way to do that is to inject capital to get some leverage and put your money to work. If you think about your investments as a business, and really our investments are like a side hustle that we use to help us retire earlier, then you want to add some capital or leverage.
Sure, that adds some volatility, but the extra return you get is a good tradeoff. And we’re not trying to solve volatility risk; we’re trying to solve longevity risk to avoid running out of money during retirement. Just like a business owner is trying to reduce the risk that they run out of money necessary to operate the business.
Expected returns in the stock market are dropping according to Martin Schmaltz, Professor of Finance and Economics at the University of Oxford and William Zane, Professor of Economics and Math at UCLA. They wrote a paper titled “Index Funds, Asset Prices, and the Welfare of Investors” showing that as index funds get bigger, it drives up stock prices and reduces expected returns.
They conclude that “While it is true that the availability of index funds allows small investors to enjoy market returns, at equilibrium, these market returns are lower than those that were enjoyed by investors before index funds became available.” One way to get back that higher expected return is to add a little bit of leverage.
The following table shows how often a hypothetical broad market U.S. equity fund that uses 1.3 times leverage outperforms the same fund with no leverage over different time periods since 1980.
Markets are up more than they are down. Since January 1980, the S&P 500 had a positive daily return 53% of the time, over the past 10 years 54%, over the past five years 54%. It’s not a trend. Focusing on downside protection is important, and there are times for that, but it shouldn’t come at the cost of sacrificing returns, especially over the long term. It’s impossible to time the market, so having consistent exposure to a little bit of leverage helps ensure that you don’t miss out on the upside, and can help reduce longevity risk.
Reid Baker, CERA, ASA, is the founder and CEO of ForAll Investment Research. He created the ForAll Core & More U.S. Equity Index, which is tracked by the ForAll Core & More U.S. Equity Index ETF (FORU).
Notes and Disclaimers
Content copyright © 2025 by ForAll Investment Research Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. This article is used with permission on this website. All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
Image: iStock.com/Maksim Safaniuk
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