The Rational Reminder Podcast

In this episode, we are joined by Chris Murray, quantitative researcher and former equity quant and trader, and Marco Sammon, Assistant Professor of Finance at Harvard Business School, for an exceptionally nerdy deep dive into leveraged exchange-traded funds (ETFs). Drawing on their research, Chris and Marco challenge common assumptions about daily rebalancing, volatility drag, and the long-term performance of leveraged products, offering a more rigorous framework for understanding how these investments actually work.
 
We explore the mathematics of compounding, the surprising relationship between leverage and long-term returns, and the competing effects of what Chris and Marco call the "convexity bonus" and volatility drag. They explain why leveraged ETFs don't simply deliver a multiple of an underlying asset's long-term return, how financing costs and fund fees compound over time, and why a stock can rise substantially while its leveraged ETF still underperforms. We also examine how daily rebalancing can affect underlying stock prices, why these effects are more pronounced in volatile, less liquid markets, and how to assess the break-even return required 
for leveraged ETFs to outperform their underlying assets.
 
Finally, we discuss what these findings mean for investors considering leverage as part of a portfolio, the distinction between modest leverage on diversified indexes and speculative single-stock products, and why the right benchmark matters when evaluating investment performance. This conversation challenges some long-held beliefs about leveraged ETFs while offering a clearer framework for understanding their risks, costs, and potential uses.
 
Sources for this episode - https://zbib.org/123d8b5649124244b85a4f43846a1fb4



Key Points From This Episode:
(0:02:07) How leveraged ETFs target daily returns rather than long‑term multiples. 
(0:03:37) Growth of leveraged ETFs, especially single‑stock and crypto products. 
(0:04:09) Lottery‑like payoffs and speculative appeal of leveraged ETFs. 
(0:05:18) Convenience: access to leverage without borrowing or manual rebalancing. 
(0:05:51) Economic theory: human capital and equity exposure early in life. 
(0:06:45) Risks of human capital — job losses and market declines coinciding. 
(0:08:10) Why modest leverage (e.g., 1.25×) may align better with portfolio theory. 
(0:10:42) Why 2× ETFs don't simply double long‑term returns of the underlying. 
(0:11:30) Convexity bonus: daily resets can create squared‑return benefits. 
(0:12:00) Volatility drag: fluctuations erode long‑term wealth in leveraged ETFs. 
(0:13:45) Distinguishing compounding effects from volatility drag. 
(0:15:00) Example: up‑10%, down‑10% → underlying loses 1%, 2× ETF loses 4%. 
(0:16:00) Interaction of convexity and volatility drag, amplified by large moves. 
(0:20:23) Daily rebalancing: how ETF trades can influence underlying stock prices. 
(0:23:00) Trading costs embedded in closing auction prices rather than spreads. 
(0:25:19) Reset intervals (daily vs. weekly/hourly): trade‑offs in drift and risk. 
(0:29:44) Overlapping ETFs concentrating rebalancing activity during stress. 
(0:32:18) Challenging the view that daily resets make ETFs unsuitable long‑term. 
(0:45:36) Break‑even return: how much the underlying must gain for ETF outperformance. 
(0:49:51) Fees, financing costs, and volatility drag erasing leverage benefits. 
(0:50:25) Predictable rebalancing trades and risks of front‑running. 
(0:53:00) Lucid example: intraday liquidation wiping out ETF investors. 
(0:55:41) Financing costs explained: borrowing ratios for 2× vs. 3× funds. 
(1:03:00) Distinguishing leverage's usefulness from product‑specific costs/risks. 
(1:31:58) Could modestly leveraged index ETFs have a role in traditional portfolios?
(1:32:56) Comparing ETF‑based leverage with borrowing directly — fees, financing, and restrictions. 
(1:35:28) Why speculative single‑stock leveraged ETFs attract attention while modest products struggle. 
Links From Today's Episode:

Meet with PWL Capital: https://pwlcapital.com/
PWL Team — https://pwlcapital.com/our-team/
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder on Spotify —https://open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=fe7f60349b584026
Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
 
Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)

In this episode, we welcome back Alex Edmans, Professor of Finance at London Business School and author of Grow the Pie, May Contain Lies, and The Madness of Markets. Drawing on academic research and real-world market examples, Alex explores how emotions, social influence, and psychological biases shape investor behavior—and why even apparently irrational markets can be difficult to beat.
 
We examine how a country's stock market can react to a football loss, why investors overreact to exciting stories and underreact to less visible information, and how identical assets can trade at different prices. Alex also unpacks the evidence behind reversal, value, and momentum strategies, the challenges of exploiting market anomalies, and why skewed stock returns make diversification so important. The conversation ultimately returns to a fundamental investing question: even if you can identify market inefficiencies, do you have the edge, patience, and cost advantage needed to benefit from them?
 
Sources From Today's Episode — https://zbib.org/7d62d23b5efc45f7b0b908b769cbfa92
 
Key Points From This Episode:
(0:01:49) How losing a World Cup match can affect a country's stock market—and what this reveals about emotion‑driven trading.
(0:03:01) The relationship between weather, sunlight, and market sentiment.
(0:03:49) Spurious correlations and data mining: why an apparent relationship needs a plausible economic explanation and out‑of‑sample testing.
(0:06:42) Wisdom versus madness of crowds: when collective judgments can be useful and when social influence leads investors astray.
(0:09:44) Overreaction in markets, from the pandemic‑era rise of Zoom to the dramatic response to Allbirds' AI rebranding.
(0:12:06) The reversal effect: why past losers can outperform past winners when investors overreact.
(0:12:53) Underreaction to long‑term information, including research linking strong workplace cultures with better stock performance.
(0:14:57) Misreaction and anchoring: how purchase prices can lead investors to sell winners too early and hold losers too long.
(0:16:50) Value investing and valuation multiples, including why a company's price relative to its fundamentals matters even when it is widely admired.
(0:22:02) Limits to arbitrage: why investors can be right about a market bubble but still fail to profit from it.
(0:24:56) The importance of investment horizons, illustrated by Alex's own equity allocation and a fund designed around a 40‑year horizon.
(0:27:55) The illusory truth effect: how repeated information can feel new and move prices, as illustrated by the market reaction to EntreMed.
(0:33:43) Momentum investing: why recent winners may continue winning, and how momentum appears across industries, sectors, and countries.
(0:39:04) The law of one price and examples of identical or closely related assets trading at different prices, including 3Com and Palm.
(1:02:20) The three recurring principles: markets work, diversification matters, and costs matter.
 
Links From Today's Episode:

Meet with PWL Capital: https://pwlcapital.com/
PWL Team — https://pwlcapital.com/our-team/
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder on Spotify —https://open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=fe7f60349b584026
Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Alex on LinkedIn — https://www.linkedin.com/in/aedmans/ Alex on X — https://x.com/aedmans Alex's website — www.alexedmans.com
 
Books From Today's Episode:
The Madness of Markets: Why Smart Investors Make Crazy Decisions—and How to Exploit Them by Alex Edmans — https://www.amazon.com/Madness-Markets-Investors-Decisions-Exploit/dp/B0GK117D54

 
Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)

In this episode, Ben Felix, Dan Bortolotti, and Kelly Thomas revisit some of the blind spots from their recent discussion about the finances of marriage before diving into a deeply nerdy discussion about leveraged ETFs. Kelly brings a different perspective to questions around spending roles, career sacrifices, financial autonomy, and the mental load of managing household finances.
 
The main discussion explores leverage, human capital, volatility drag, and the long-held belief that daily resets make leveraged ETFs poor long-term investments. Ben explains how his own thinking changed after feedback from the Rational Reminder community and a growing body of research, arguing that daily resets themselves do not cause volatility drag—volatility does. The conversation examines when leverage might make theoretical sense, why the safety of human capital is a critical assumption, and why what looks optimal in a model may be difficult to stick with in real life.
 
They also examine the practical risks and costs of leveraged ETFs, including financing costs, swap counterparty risk, extreme drawdowns, and the very different experience of leveraged index ETFs versus single-stock leveraged ETFs. The episode ultimately comes back to a broader financial planning question: if your financial goals can be achieved without leverage, do you actually need the additional risk?
 
Key Points From This Episode:
(0:04:00) Kelly Thomas joins to discuss marriage and money.
(2:33:00) Household roles and mental load complicate "spendthrift vs. tightwad" labels.
(4:32:00) Career sacrifices (leave, reduced hours, missed promotions) carry lasting financial costs. 
(5:37:00) Financial autonomy vs. infidelity—transparency doesn't mean loss of independence. 
(6:52:00) Financial control can cross into abuse; independent access to money is essential. 
(9:19:00) Ben revisits leveraged ETFs, challenging the idea that daily resets inherently cause decay. 
(13:26:00) Historical performance of 3X S&P ETFs shows leverage depends on volatility, costs, and timing. 
(17:14:00) Leverage amplifies exposure and volatility, often reducing compound returns. 
(21:43:00) Models vs. reality: what looks optimal economically may be impossible to stick with. 
(27:00:00) Income risk can coincide with market declines, creating economic and behavioral challenges. 
(28:00:00) Diversification across time: spreading equity risk earlier in life through leverage. 
(36:15:00) Leveraged ETFs during crises (2008, COVID) show extreme difficulty of holding through drawdowns. 
(40:14:00) Leveraged ETFs offer convenience and non-recourse features, but financing costs are high. 
(53:00:00) Total costs can exceed 5% annually; single-stock leveraged ETFs face even steeper hurdles. 
(58:37:00) Kelly reframes: financial planning is about goals, not maximum returns—money is a tool, not the end.
 
Links From Today's Episode:
WEBINAR | A Conversation With David Booth (November 4, 12:15 ET)* — 
https://pages.pwlcapital.com/webinar-a-conversation-with-david-booth
*The first 250 Canadian residents to register will receive a FREE copy of David's book, "Stay Calm
Sources From Today's Episode — https://zbib.org/455c998cf1784f5299ff981c8b96f6d2
Meet with PWL Capital: https://pwlcapital.com/
PWL Team — https://pwlcapital.com/our-team/
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder on Spotify —https://open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=fe7f60349b584026

Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
 
Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)

In this episode, we're joined by Victor Haghani, founder of Elm Wealth and co-author of The Missing Billionaires, for a wide-ranging conversation about how different types of investors shape financial markets. Victor explains the framework behind his forthcoming paper, Who Killed the Random Walk?, and how fundamental investors, static investors, and extrapolators interact to produce momentum, excess volatility, and other market anomalies.
We explore why return chasing is different from momentum investing, how investor flows and inelastic demand can move markets, and how the Merton share connects expected returns and risk to portfolio allocation. Victor also discusses long-short direct indexing and tax-loss harvesting, his experiment giving investors tomorrow's Wall Street Journal today, how AI performed in the same trading game, the role of leverage in financial markets, and when borrowing to invest might make sense. We finish with Victor's advice to his younger self: be intentional about financial planning, build financial literacy, and make a plan.
Key Points From This Episode:
(0:01:20) Lessons from The Missing Billionaires—practical insights on sizing and the Kelly criterion. 
(0:03:13) Who Killed the Random Walk?—persistent puzzles in stock returns: excess volatility, momentum, fat tails, booms, and busts. 
(0:05:06) Victor's three investor types: fundamental value investors, static investors, and extrapolators. 
(0:07:54) How static investors amplify market movements through inelastic demand. 
(0:11:11) How investor types interact to shape volatility, momentum, and equilibrium. 
(0:14:02) Wealth flows between investor types and how they create instability in simulations. 
(0:18:15) Distinguishing extrapolative return chasing from systematic momentum strategies. 
(0:20:34) How extrapolators create price trends that momentum investors exploit. 
(0:23:46) The Merton share—risk premiums, volatility, and risk aversion in determining equity exposure. 
(0:26:39) Combining value and momentum for higher Sharpe ratios. 
(0:32:34) Long‑short direct indexing and how leverage increases tax‑loss harvesting. 
(0:34:00) Why fees, complexity, and risk of direct indexing may not be worthwhile without alpha. 
(0:43:21) The "crystal ball" experiment—advance information, poor sizing, and excessive leverage. 
(0:49:28) The role of leverage in markets—ETFs, options, embedded leverage, and nonlinear instability.
(0:52:50) Why leverage can create nonlinear interactions and amplify market instability.
(0:52:55) When borrowing to invest can make sense, particularly for younger investors with substantial human capital and limited financial capital.
(0:55:00) Why borrowing costs, expected equity returns, risk, and the possibility of losing a large portion of savings make leverage a difficult decision.
(0:57:29) Why the risk-adjusted return from additional equity exposure matters more than the headline expected return.
(0:58:42) The relationship between human capital and leverage—and why human capital is not necessarily bond-like.
(1:00:01) Victor's advice to his younger self: be proactive, become financially literate, and make a lifetime financial plan.
(1:02:18) Why dedicating time to financial education can meaningfully change how people approach financial decisions.
Sources From Today's Episode — https://zbib.org/62e42e55fae14cb0a1aa62941d6996a2 
Links From Today's Episode:

Meet with PWL Capital: https://pwlcapital.com/
PWL Team — https://pwlcapital.com/our-team/
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder on Spotify —https://open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=fe7f60349b584026
Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Victor's website — www.elmwealth.com 
Books From Today's Episode:
Get Rich Once: and Other Financial Wisdom for Our Younger Selves by Victor Haghani, James White — https://www.amazon.com/Get-Rich-Once-Financial-Younger/dp/1394479964 
The Missing Billionaires by Victor Haghani, James White — https://www.amazon.com/Missing-Billionaires-Better-Financial-Decisions/dp/139430823X 
Papers From Today's Episode:
Who Killed the Random Walk? How Extrapolators Create Booms, Busts, Trends, and Opportunity — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6062494 
 
Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)

What happens when a small group of exceptionally wealthy people holds a growing share of a country's income and wealth? And what can economics tell us about the forces behind that concentration?
 
In this episode, we are joined by Owen Zidar, professor of economics and public affairs at Princeton University and coauthor of the forthcoming book The Everywhere Millionaire. We explore the rise of the millionaire class, how tax policy shapes inequality, and why the geography of wealth matters when trying to understand the economic landscape.
 
We also discuss the role of entrepreneurship, industry-specific knowledge, and concentrated ownership in building wealth. Owen shares insights from extensive Treasury data, interviews with business owners, and research into the paths taken by millions of entrepreneurs. The conversation examines why access to capital may be less important than practical experience, how private equity can help or hurt business owners, and how local business consolidation can affect both consumers and workers.
 
Finally, we explore the influence of "everywhere millionaires" on public policy, the impact of interest rates on wealth valuations, and possible ways to expand access to entrepreneurial opportunities without undermining economic growth.
 
Sources From Today's Episode — https://zbib.org/75a6ae2e79a34ba8b5fb632f54816447
Books From Today's Episode — The Everywhere Millionaire: Who Is Really Rich in America and How They Got There
by Owen Zidar

Key Points From This Episode:
(0:01:15) Why the typical wealthy American is more likely to be a business owner than a celebrity or Wall Street executive.
(0:02:12) How "everywhere millionaires" can provide a roadmap for building wealth and understanding inequality.
(0:03:33) The rise of entrepreneurial income among the top 0.1% over the past several decades.
(0:04:48) Why the inequality debate often overlooks wealth generated by private businesses.
(0:05:48) Why the typical millionaire is more likely to be found on Main Street than Wall Street.
(0:06:32) The ordinary—and sometimes unusual—industries that produce substantial wealth.
(0:08:01) Why building wealth through business ownership often takes decades.
(0:08:54) The role of concentrated ownership and the risks involved in becoming wealthy through entrepreneurship.
(0:09:51) How failed businesses can still provide valuable human capital and career opportunities.
(0:10:46) Which early-career paths may put people on track to become business owners.
(0:12:14) Why domain expertise and industry experience can matter more than access to capital.
(0:15:25) The Treasury data, tax records, research papers, interviews, and other sources behind The Everywhere Millionaire.
(0:16:54) How lower interest rates, tax cuts, deregulation, and globalization contributed to wealth accumulation.
(0:18:18) What the data suggests about academic performance, risk-taking, and entrepreneurial success.
(0:19:52) Why attending an elite university is not necessarily a prerequisite for becoming wealthy through business ownership.
(0:20:57) The importance of early labor-market experience and practical knowledge in entrepreneurship.
(0:22:17) The factors that help certain places foster upward mobility.
(0:30:14) How family businesses, inheritance, and succession can shape the distribution of wealth.
(0:38:06 How business owners can successfully exit their companies, including the role of seller financing.
(0:39:09) The potential benefits and drawbacks of private equity for business owners.
(0:41:33) How "stealth consolidation" can allow businesses to gain local market power without attracting regulatory scrutiny.
(0:42:55) The possible relationship between product-market power and labor-market power.
(0:44:33) Whether the United States is experiencing a new Gilded Age—and how today's wealthy differ from those of the past.
(0:46:07) Why local business owners can have significant economic and political influence in their communities.
(0:48:47) How interest rates affect the value of private businesses and other assets.
(0:49:49) How apprenticeships and alternative career paths could expand access to financial success.
(0:50:41) What aspiring entrepreneurs can do to reduce risk and improve their chances of success.
(0:51:45) Potential approaches to reducing inequality while preserving incentives for business growth and investment.
(0:53:48) Owen's reflections on family, personal fulfillment, and how he defines success.
 
Links From Today's Episode:

Meet with PWL Capital: https://pwlcapital.com/
PWL Team — https://pwlcapital.com/our-team/
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder on Spotify —https://open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=fe7f60349b584026
Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Owen's website - https://www.everywheremillionaire.com/

Owen's LinkedIn - https://www.linkedin.com/in/owenzidar/



Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)