Though the above combination of stocks and bonds is perfectly reasonable, I like to diversify further into a few other categories. Mainly I add the following, either in ETFs, options, futures, or physical assets where applicable. The options columns in the tables below have higher option liquidity, however their expense ratios might be higher for buy and hold.

| Category | ETFs | Options | Futures | Physical |

These in sum do not exceed about 8% of my portfolio. I reduce my bonds allocation by 8% to make room for these. The reasoning is to keep some investments non-correlated with stocks/bonds. [Portfolio Visualizer](https://www.portfoliovisualizer.com/asset-correlations) can be used to investigate correlations.

Managed futures ETFs have been proposed as an alternative to bonds in a portfolio because bonds sometimes correlate highly with equities. Managed futures are also referred to as [CTAs](https://en.wikipedia.org/wiki/Commodity_trading_advisor) (Commodity Trading Advisor). They mimic hedge funds (i.e. hedge fund replicators). They attempt trend following with derivatives, and may provide a good negative correlation with equities, reduce volatility, and generate higher return. [Here](https://testfol.io/?s=0vkpeDtG6iQ) and [here](https://testfol.io/?s=4JxBbB5TRL2) are backtests comparing a 60/40 (equities/bonds) portfolio with various mixtures of managed futures ETFs. Replacing some of your bonds allocation with managed futures might be a good strategy. I hold about 5% of my portfolio, or 25% of my bonds allocation, in managed futures.

Popular managed futures ETFs:

- [Was 60/40 a Big Head Fake? Some charts from DBi](https://dbi.co/was-60-40-a-big-head-fake-some-charts-from-dbi/)

Banks and brokerages give little in return for holding your cash. A HYSA will give you better return, but sometimes suffer from bad checking account features. For example, Wealthfront has very bad check-writing abilities.

Excess cash in your brokerage should be put into a money market fund. For example, at Schwab you can use [SWVXX](https://www.schwabassetmanagement.com/products/swvxx). The key point is many brokerages won't automatically sweep to this for you, so it requires you to do trades. SGOV and BIL are other good ETFs for this. You can find good money market funds at [Yieldfinder](https://yieldfinder.app/money_markets).

If you don't do this yourself, your brokerage will love your idle cash sitting around which they will use to invest and earn them, and not you, money. I do not hold much cash because inflation quickly eats into its value. I'd rather put that money to better use.

If attempting to use SWVXX as a backing for Cash Secured Puts, see [[SWVXX and Cash Secured Puts|Finance/Investing/SWVXX and Cash Secured Puts]].

Occasional portfolio rebalancing is necessary unless you are only invested in an automatic glide path fund. I just contribute funds to the deficient allocation category. If it requires a much higher amount than the funds available, utilizing leverage can get me to a balanced portfolio quicker.

The paper [Rebalance your portfolio without selling](https://arxiv.org/pdf/2305.12274) describes some more ways to optimize rebalancing.

If I needed to sell $8000, I could by 2 of these. What if I wanted to spend less? I could create a synthetic short: sell a call, and buy a put (essentially funding it with the sold call), at strike price 80. For larger sums, I might use SPY or futures.

The main question to ask yourself is are you using your capital the best way possible? In many cases your brokerage is giving you access to tools and methods to make better use of that capital. They will not tell you all of these methods, which one is best, or hold your hand through the process, unless you pay them.

| $15k of SSO (2x leveraged ETF) | $15k | $30k | 2x |

| $10k of UPRO (3x leveraged ETF) | $10k | $30k | 3x |

| 1 ZEBRA LEAPS in SPY (2 long calls, 1 short call) | $14k | $50k | 3.5x |

This method of using leverage is also referred to as "return stacking", and there are some [ETFs](https://www.returnstacked.com/) that also try to do this for you.

A typical company might use a loan to ultimately produce something worth more than that loan, in a sense making a leveraged bet. You could argue companies would not exist without such leverage. Even credit card debt can be considered a form of very expensive leverage. If you acknowledge leveraging exists throughout the economy, then why not use it to your advantage in your personal finances as well?

The following book provides a good argument for using leverage. The general idea is use high leverage when young and reduce that leverage towards retirement:

- [Website](https://lifecycleinvesting.net/index.html)

[This paper on risk parity](https://www.aqr.com/-/media/AQR/Documents/Insights/Perspectives/Risk-Parity-Why-We-Lever.pdf) generally describes how I use leverage.

- Exclude box spread loans as these should be treated like a margin loan and part of negative option value below

- Positive for long, negative for short

- Futures margin requirement (negative)

Suppose you have $100k and want to leverage to 1.5 into the S&P500. You can buy $50k of SPY or equivalent, and $50k of SSO. That would give you notional exposure of $150k.

When you have stocks, brokers will let you take a margin loan of at least 50% or more of your equity value. This gives you at least 1.5 leverage, at the cost of margin loan interest, which is usually terrible at most brokerages. For example, Schwab will charge you 13% interest as of today (June 2025). If you cannot make more than 13% on the investments you do with leverage, you won't even break even. Interactive Brokers will give you a much better rate, for example 5%. This is an easier number to beat on investment return.

One way to reduce interest charges is using a forex margin loan (sometimes called a carry trade). Your broker may have a much lower interest rate for borrowing in another currency like CHF. Say that is 1.5%. You can take a CHF loan, convert that to USD, and use the funds to invest in US stocks. However, you must now beat both the 1.5% margin interest as well as any forex rate changes. For stable currencies like CHF, I've had good results for multi-year timeframes. However, if there is a big drop in USD value to the foreign currency, your loan repayment can be much bigger than you expected. Many people have done this with JPY due to its low interest rate.

You can use forex futures to lock in an interest rate for the loan. For example, buying a /6S future will offset any currency fluctuation with CHF.

Overview video:

Assume I have $100k invested in plain equities. I want to leverage up to 1.5 to invest in US large cap. I buy DITM LEAPS calls 1 year out in SPYM (a lower cost version of SPY), using the strike price for .90 delta:

- 6 SPYM 2026-03-20 53 CALL

The actual cost of the options might be $12700 in cash. That means $12700 is giving a notional exposure of $28620 in the S&P 500.

This involves buying an ATM call and selling a put at the same strike. It is similar to using futures for leverage.

Overview video:

Assume I have $100k invested in plain equities. I want to leverage up to 1.3 to invest in US large cap. I setup an ATM synthetic long 1 year out in SPYM:

- 4 SPYM 2026-03-20 71 Call

Since they are ATM the delta will be .50 for both. The exposure is:

- [How I Trade Zebras in a 5K-10K Account](https://youtu.be/KVVxPwVdmOo?si=6_D68JKfgJq1bGzU)

- [The Hidden Logic of Options | Put-Call Parity Explained with Legos](https://youtu.be/vYPulKD58fA?si=MnaT62VW2FJisOIN)

- [How To Trade Options in 2 Hours 12 Minutes and 4 Seconds | Live Bash Series](https://youtu.be/441HWKDot0Y?si=kYyqLX-V39qhbr3d)

- [Options profit calculator](https://www.optionsprofitcalculator.com/)

- [How to Start Trading Futures l BEST Trading Tips For Beginners!](https://youtu.be/C-rrNirdXl4?si=LYNdSloOP4y5efrD)

Futures margin is confusingly not the same as equities margin. When you buy or sell a futures contract, it costs nothing other than the commission. Instead, you put up in cash a good faith deposit. which is called its margin requirement. Every day, depending on whether the position moves for or against you, it is marked to market and funds are either deducted or added to your deposit. You get that deposit back, along with any profit or loss, when the contract closes.

Importantly, a futures contract requires actual cash. This is same for buying or selling a contract. The broker will let you borrow that cash from your equities account via a margin loan. This is different from an options trade which might only use your buying power and not require any cash or loan at all.

The main point is you need to have cash in your account to cover the margin requirement plus any possible losses in the futures contract. Typically people hold 2 to 3 times the margin requirement in cash just to be on the safe side.

Explanation from a Schwab rep:

Explanation from Interactive Brokers:

The /10Y futures represents the current 10-year treasury yield. If the current yield is rising, it means newer bonds are worth more than older bonds. i.e. the return on newly issued bonds are greater than older issued bonds. The inverse should also be true.

ETFs like BND contain a mix of different types of bonds, but should be mostly older issued bonds. So what we should see is an inverse correlation of the /10Y future with the BND price. This indeed looks true based on a graph of BND with /10Y:

In many cases you will use the cash you received using leverage to buy further investments. However, this cash can be used for anything you want. The interest rates on these loans can beat standard bank loans. You can even opt to never pay the loan back, which is essentially the ["buy, borrow, die"](https://smartasset.com/investing/buy-borrow-die-how-the-rich-avoid-taxes) strategy. When you die, whoever inherits your equities will get their cost-basis reset to the value at inheritance, which means no capital gains if they sell.

Taking a cash loan from your stocks is essentially a leveraged trade. You have pulled money out while keeping your stocks, therefore you have increased your leverage. As an example, let's say I have $325k in stocks. Without any loan, my leverage ratio as defined above is:

Both notional exposure and portfolio equity is equal, so my leverage ratio is 1. Let's say I now pull out $100k in cash, taking a margin loan. My leverage ratio becomes:

With different leveraging strategies I can achieve the same leverage in multiple ways. In this case I've just used a margin loan.

Let's say instead I start with $325k in cash, and no equities. My leverage ratio is 1. I buy 1 /ES S&P 500 future, which has about $325k in notional value and requires about $25k cash set aside (margin requirement). As it stands my leverage ratio is:

There is now $300k leftover in cash. If I start withdrawing cash, the leverage goes up, and I can easily match the 1.44 in the first example. Suppose I withdraw $75k in cash:

I've essentially done the same thing as a margin loan, albeit for a smaller cash loan ($75k vs $100k). With the margin loan, there is the daily interest cost. With the futures "loan", the interest is baked in because the futures quote for a later date will be higher than the current index quote.

How can we compare the interest rates? For the margin loan it is simple and is what the brokerage gives us, say 6%. The cost of 1 year borrowing $100k is $6k.