{"id":123,"date":"2026-08-01T17:12:41","date_gmt":"2026-08-01T17:12:41","guid":{"rendered":"https:\/\/quant.avalonquant.com\/2026\/08\/leveraged-etf-rotation-18-cagr-does-it.html"},"modified":"2026-10-16T16:20:30","modified_gmt":"2026-10-16T07:20:30","slug":"leveraged-etf-rotation-18-cagr-does-it","status":"publish","type":"post","link":"https:\/\/avalonquant.com\/blog\/2026\/08\/leveraged-etf-rotation-18-cagr-does-it.html","title":{"rendered":"Leveraged ETF Rotation: 18% CAGR \u2014 Does It Beat SPY?"},"content":{"rendered":"

Welcome back to Avalon QuantBrief, where we dissect high-performing quantitative strategies for modern markets. Today, we are backtesting and optimizing one of the best-known momentum frameworks in finance: Leveraged ETF Rotation. By systematically rotating out of danger, this approach tames the volatility decay of triple-leveraged assets to deliver institutional-grade returns.<\/p>\n\n

\nBacktest Summary (2017\u2013present)<\/strong>

\n\ud83d\udcc8 CAGR: 18.1%<\/strong>
\n\ud83d\udcc9 Max Drawdown: -25.4%<\/strong>
\n\u26a1 Sharpe Ratio: 0.82<\/strong>
\n\ud83d\udcb0 Total Return: 425.5%<\/strong>
\n\ud83c\udfaf Universe: US leveraged index ETFs, defensive assets and cash-like funds<\/strong>\n<\/div>\n

The Core Mechanics of the Strategy<\/h2>\"scene\"

The original model rotates through high-growth leveraged ETFs and uses Treasuries, gold and cash-like funds for safety. A market-regime filter that combines trend and volatility conditions decides when to take risk; when the filter fails, the strategy exits to defensive assets to limit drawdowns.<\/p><\/div>

Upgrading the Framework for Modern Regimes<\/h2>\"scene\"

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.<\/p><\/div>

Analyzing the Backtest Performance<\/h2>\"scene\"

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.<\/p><\/div>

Equity Curve and Drawdown Protection<\/h2>\"scene\"

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.<\/p><\/div>

The Final Verdict on Leveraged Rotation<\/h2>\"scene\"

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.<\/p><\/div>\n

\u26a0\ufe0f Not financial advice. This is for educational purposes only. Always do your own research before investing.<\/em><\/p>\n\n

Go further on AvalonQuant<\/p>