Investing ETF/Index with leverage: Which is a better deal -- LEAP Options or Margin loans?

The primary ways to get leverage are 1) futures, 2) margin, and 3) options. A quick search makes me realize that futures contracts have high tax rate (23%) compare to LEAP. The guy at IndexRoll (who advocates LEAP) even published a book that covers all the sources of leverage, which I think is a good general introduction. There's one problem -- he left out the issue of taxes. The same person appears to had a debate on a forum over margin loans vs LEAPs, but they didn't get into the specifics on the topic of taxes and just leave it as "depends". Here I give you some hard numbers to figure it out and it appears that margin is a better deal.

Margin vs LEAPs:

Benefits of LEAP:
  1. Long-term capital gain tax after a year (instead of short-term).
  2. No margin calls.
  3. Fixed interest rate (for one year before the next "roll").
  4. No capital gain if cash exercise.
Benefits of Margin:
  1. Lower interest rate (because of tax efficiency and historically yield curve goes up).
  2. Long-term capital gain tax ONLY in the final year.
Numbers showing margin is a better deal:
If you assume these (very reasonable) variables below it appears that margin is a better deal. After five years the difference of the two is 3.8%, after 10 years it's 6.17%, and after 20 years it's 11.56%.
  • Margin Rate: 6.50%
Margin rate depends on many variables (size of loan, broker, and possibly collateral). Go here for your personal margin rate IB, etrade, vanguard, and schwarb.
  • LEAP Interest Rate 3.00%
This depends on a lot of elements (e.g. interest rate and volatility), but you can check the rate for SPY here.
  • Dividend 1.74%
  • Growth 8.50%
  • Marginal Tax 28.00%
  • Cap-Gain 15.00%
Here is the spreadsheet that shows year by year details.

Problem with margins:The primary problem with margin are 1) Margin call risk, 2) variable interest rate, and 3) only investment income can deduct with margin interest (in the US).

For #3 the amount of maximum leverage you can get and still keep the full benefit of tax deduction is about 1.37X. More precisely it should follow this relationship,

L = M / (M - D), and 6.5 / (6.5 - 1.74) = 1.37

In reality you probably won't get leverage "much" higher than that so problem #1 and #3 balances each other out. If you want higher leverage though it's true that the value of margin decreases, and you need to run the numbers for your personal scenario to come to a conclusion.

At 1.3X leverage you can sustain 47% loss before a margin call (assume 30% maintenance margin). You'll have to decide if you can find additional funding before your position loses that much value.

The problem of variable interest rate risk is a valid one. You'll have to decide if that is a risk you want to take or hedge it some other way.

Other sources of leverage:
There're other ways of getting leverage like leveraged funds or credit cards. The problem with leveraged funds is well documented.

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