The 60/40 equity-bond portfolio remains a widely used benchmark for long-term asset allocation, despite ongoing debate over its optimality (Pham et al., 2025). However, for many households, the challenge lies not in the framework itself, but in the amount of capital required to implement it. Limited investable assets, the desire to avoid explicit borrowing, significant exposure to residential real estate and the need to maintain liquid reserves often limit the ability to fully fund a traditional allocation.
Leveraged ETFs offer an alternative. Rather than increasing risk, they allow households to achieve desired risk exposure with less capital deployed, improving management of liquidity, real estate indebtedness and broader balance sheet constraints. As illustrated below, leveraged ETFs combined with cash investments can approximate the risk characteristics of a traditional 60/40 portfolio while avoiding margin accounts, personal lines of credit, or other forms of household-level leverage.
By separating market exposure from capital obligations, this framework maintains liquidity and financial flexibility, while maintaining the known asset allocation profile.
Motivation: Asset allocation at household level
For most retail investors, portfolio construction takes place within the constraints of household balance sheets, where residential exposure, mortgage leverage, employment income risk and liquidity needs shape viable investment choices. Many households already have structural access to real estate through real estate. In recent decades, rising house prices in developed economies have increased net worth, while at the same time concentrating risk on illiquid assets. As a result, investors are often overweight real assets and underweight liquid financial assets.
Traditional forms of financial leverage come with additional risks that many retail investors are unwilling or unable to bear, including margin calls during withdrawals, fixed repayment obligations on credit lines, and behavioral pressures that can lead to ill-timed derisking or forced liquidation during periods of heightened volatility.
In contrast, when used thoughtfully, leveraged ETFs (whose leverage is at the fund level rather than on household balance sheets) allow investors to separate market exposure from capital deployment, providing greater flexibility in household portfolio construction.
Methodology and portfolio construction
The following analysis evaluates whether a portfolio constructed from stock and bond ETFs combined with cash can approximate the return and volatility characteristics of a traditional 60/40 stock-bond portfolio, without relying on margin, personal loans, or other forms of household-level leverage.[1].
Benchmark and instruments
The target allocation is a conventional 60/40 portfolio consisting of:
- 60% exposure to the S&P 500
- 40% exposure to US government bonds, represented by a maturity of approximately seven years
To implement these exposures, the analysis uses the following tools:
- A hypothetical ETF that delivers three times the daily return of the S&P 500
- A hypothetical ETF that delivers three times the daily return of long-maturity US Treasury bonds (maturity greater than 20 years; duration ≈16), scaling position size to achieve target portfolio duration
- Cash that earns overnight interest
Although the leveraged Treasury instrument has a longer underlying maturity, the portfolio weight is scaled such that the resulting effective maturity of the combined portfolio approaches the seven-year target.
Cost and financing assumptions
To better approximate real-world performance, the following assumptions have been included:
- Annual Management Expense Ratio (MER): 1%
- Financing costs at fund level: overnight interest rate + 50 basis points
- Cash earns the nightly rate
Portfolio construction process
Instead of setting nominal portfolio weights, the strategy aims for stable effective market exposures:
- An equity exposure equivalent to approximately 60% of the S&P 500
- A Treasury term of approximately seven years
At the end of each month, portfolio weights are adjusted to maintain these exposure targets. Stock and bond ETF allocations are scaled to achieve the desired stock exposure and portfolio duration, with residual capital allocated to cash. Monthly rebalancing is necessary to compensate for the exposure bias resulting from the daily reset nature of leveraged ETFs.
Due to the daily reset nature of leveraged ETFs, effective exposures vary over time, necessitating periodic rebalancing. During the sampling period the result is average The portfolio weight is approximately 20% in the leveraged equity ETF, 15% in the leveraged Treasury ETF and 65% in cash.
Observed results and comparison with 60/40
The strategy is retested using monthly data from December 31, 2022 through December 31, 2024 and evaluated against a traditional 60/40 benchmark (Table 1). Over the sample period, the leveraged ETF plus cash portfolio produces cumulative returns roughly comparable to those of the benchmark. More importantly, the realized volatility closely matches that of the traditional 60/40 portfolio, indicating that the exposure targeting framework is effective at replicating first-order risk characteristics.
Table 1 (Summary Statistics)
Track differences
Periods of divergence between the two portfolios are mainly caused by:
- Daily leverage reset effects during volatile markets
- Embedded funding costs within leveraged ETFs
- Monthly rebalancing frequency
- The prevailing environment for cash returns
These factors create a tracking error, but do not materially change the overall risk profile of the portfolio.
Figure 1 (Annual return)
Figure 2 (Allocation %)
Distributional effects
Although average returns and volatility are similar, the leveraged portfolio exhibits fatter tails compared to the traditional 60/40 portfolio. This reflects the non-linear return dynamics introduced by daily leveraged instruments, especially during periods of high volatility.
Figure 3 (Return distribution)
Practical risks and limitations
While the framework illustrates a capital-efficient approach to risk management, it introduces important tradeoffs that require careful consideration. Leveraged ETFs are designed to track multiples of daily index returns; over longer periods, their performance becomes path dependent due to daily leverage resets, with volatility resistance increasing non-linearly as leverage increases (Pessina and Whaley, 2021).
Additionally, the analysis is based on hypothetical leveraged ETFs, and realized performance of actual products may differ from modeled results, especially during periods of market stress. While the average volatility may match that of a traditional 60/40 portfolio, the use of leverage increases tail risk, implying a greater chance of extreme outcomes.
Figure 4 (Decrease)
Capital efficiency as portfolio design
Leveraged ETFs are often dismissed as unsuitable for long-term investors due to their volatility and path dependence. This analysis shows that, when used within a disciplined and exposure-managed framework, leveraged ETFs can instead function as tools to improve capital efficiency rather than increasing portfolio risk. By replicating the risk characteristics of a traditional 60/40 equity-bond portfolio with substantially less capital invested, this approach allows households to maintain liquidity and limit the concentration resulting from residential real estate exposure. While careful implementation and ongoing risk awareness remain essential, the framework highlights an underappreciated use of leverage in the construction of modern household portfolios.
References
All data in tables and figures come from Bloomberg
Pessina, C. J., & Whaley, R. E. (2021). Levered and inverse listed products: blessing or curse? Financial Analyst Journal, 77(1), 10–29. https://doi.org/10.1080/0015198X.2020.1830660
Pham, N., Cui, B., and Ruthbah, U. (2025). The performance of the 60/40 portfolio: a historical perspective (research report). CFA Institute Research and Policy Center. https://rpc.cfainstitute.org/research/reports/2025/performance-of-the-60-40-portfolio
[1] This framework is presented for educational purposes only and should not be construed as an investment recommendation.
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