Enhanced Indexing Strategies: Utilizing Futures and Options to Achieve Higher Performance

Preface

What if we could borrow money at 5 percent and reinvest it at 10 percent annually for years or even decades? This simple idea proved to be the seed for an ambitious project, a book created to show investors how to use futures and options on index-linked securities to earn very high portfolio returns. After more than a year of writing and research, here is that book.

To achieve our goal, we start with the highest performing and most reliable investment available in the marketplace, the index fund. In the past several years, literally hundreds of index-related products have been introduced in the marketplace, most designed to capture a narrow slice of returns in the broad markets and provide investors with the capability to mix and match different funds in order to build custom portfolios.

Ironically, this wide variety of investment products creates a security selection problem that is very similar to the one that indexing was created to avoid. In this book, we show exactly why some indexes perform better than others and how to successfully combine products into portfolios that deliver better risk-adjusted returns than Standard & Poor’s 500 Index (S&P 500). These index portfolios are the basis of our leveraged portfolios.

The next step is to apply leverage, and the most cost-effective way to do this is by using derivatives such as futures and options. With these instruments, it is possible to not only borrow money to invest at a low rate of return, but also, when using options, ...