What is Smart Leverage, and how does it work?

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Smart Leverage is a rules-based overlay used in several DMS strategies that selectively deploys leveraged ETFs during market recovery windows - when the odds are in your favor of capturing additional gains on the upside without large downside risk. It is not the same as being permanently leveraged. The base strategy operates unleveraged; leverage is an occasional, conditional event triggered by a market drawdown.

Arming, then deploying

Smart Leverage works in two steps, and the distinction matters when you are watching a live allocation.

Step one: arming. Smart Leverage watches the month-end drawdown of IWB (the iShares Russell 1000 ETF) from its highest month-end close on record. When that drawdown reaches 10% or greater, Smart Leverage arms. Nothing changes in the portfolio yet.

Step two: deploying. Once armed, Smart Leverage waits for a month where all of the following are true:

It is a later month than the one that armed it. Arming and deploying never happen in the same decision.
IWB's momentum has turned favorable against cash.
The strategy's own Risk On choice includes U.S. large cap.

Only then does the substitution happen:

2× strategies (Global Navigator 200, LT Gain 200, Triad 135, Carrier 170) enter SSO, a 2× S&P 500 ETF. Carrier 170 also swaps its QQQ holding for QLD, a 2× Nasdaq-100 ETF.
3× strategies (Global Navigator 300, LT Gain 300, Triad 170, Carrier 240) enter UPRO, a 3× S&P 500 ETF. Carrier 240 also swaps its QQQ holding for TQQQ, a 3× Nasdaq-100 ETF.

Only the U.S. stock holding is swapped. Everything else in the strategy stays as it is. Global Navigator holds one position at a time, so its whole portfolio goes leveraged. Triad leverages only its 35% U.S. large cap sleeve, and Carrier its roughly 70% in U.S. stocks.

The wait can be long. In the spec's worked example the drawdown armed Smart Leverage in March 1980, but momentum did not turn until June, so June is when leverage was actually deployed.

The drawdown is measured from month-end close to month-end close; intraday swings do not trigger Smart Leverage. It can accumulate across multiple months of declining markets, so it is not a single-month measure.

Catalyst works a little differently

Catalyst 200 and Catalyst 300 run Smart Leverage on QQQ instead of IWB, because QQQ is the holding they lever. The arm is a 10% drawdown in QQQ from its high, the momentum test is QQQ against cash, and the leveraged funds are QLD (2×) and TQQQ (3×). Only the QQQ portion is swapped, so when Catalyst holds a 50/50 energy and QQQ blend, half the portfolio goes leveraged. Catalyst also exits leverage whenever its regime changes away from a holding that includes QQQ.

If the strategy rotates to international instead

For strategies that can hold international equities, there is an important exception. If the strategy's Risk On choice turns out to be international rather than IWB while Smart Leverage is armed, the arm is cancelled rather than deployed.

The reasoning: the drawdown fired during a stretch where the strategy preferred international markets. Coming back to IWB later is a different environment, not a continuation of the recovery that armed it.

A cancelled arm also blocks re-arming until the strategy passes through a Risk Off month. Without that block, the drawdown still sitting on the books would simply re-arm Smart Leverage the following month and undo the cancellation.

This is why Global Navigator did not use leverage after the 2008 financial crisis. It came out of cash in May 2009 into international stocks, which led the market for the rest of that year, so the arm was cancelled.

Once leverage is already deployed, the rule is different. If the strategy rotates from IWB to international mid-deployment, the deployment continues and the leveraged fund replaces the international holding for that month. A rotation inside a recovery that is already under way is treated as noise, not an exit signal.

The exit rule

A live deployment ends on whichever of these comes first:

The 13-month cap is reached. Deployments are capped at thirteen consecutive months, which limits exposure to the volatility decay that erodes leveraged ETFs over long holds.
The strategy goes Risk Off. Leverage exits regardless of momentum.
Cash momentum overtakes IWB. This is its own exit condition and can fire even while the strategy still holds equities elsewhere.

When the position closes, the strategy returns to its unleveraged default.

After a deployment ends: every deployment needs a fresh setup

This is the rule most often misread. When a deployment ends, for any of the three reasons above, Smart Leverage does not jump back in just because momentum turns favorable again the next month. It goes back to waiting, and the whole sequence has to happen again:

At a later month end, IWB must still be, or again be, at least 10% below its high. That re-arms Smart Leverage.
At a month after that, momentum must confirm once more, with the strategy back in U.S. large cap.

Because re-arming takes a month end of its own, there are always at least two unleveraged months between deployments.

What this means in practice depends on how far the market is from its high:

If the market has recovered to within 10% of its high, the pullback is used up. Only a new 10% decline can bring leverage back. The spec's diagnostic case is April 1981: IWB was beating cash and the strategy was in equities, but IWB was only about 4% below its high, so Smart Leverage stayed on the sidelines.
If the market is still more than 10% below its high, Smart Leverage can deploy more than once in the same long decline. In April 2002, Smart Leverage deployed on what turned out to be a false start and was out a month later as the market rolled over. The market kept falling into October 2002, still far below its 2000 high, so Smart Leverage re-armed. When the real recovery arrived in April 2003, it deployed again and rode the full thirteen months, one of the best deployments in the record.

A stricter version that allows only one deployment until the market makes a new all-time high was tested and rejected. It would have skipped the 2003 recovery, along with 1982, 1988, 2012 and late 2023, and it did not reduce maximum drawdown at all.

A note on taxes

The 13-month cap is set where it is with taxable accounts in mind. The IRS long-term test requires holding more than one year, and a 12-month hold falls just short of it, so the cap was raised from twelve to thirteen months in August 2026. A deployment that runs the full duration should now clear the long-term threshold. Shorter deployments that exit early on momentum or Risk Off will still be short-term. Your own treatment depends on actual trade dates and your tax situation.

How often does it trigger?

Smart Leverage triggers infrequently and selectively. The goal is not to be leveraged most of the time, but to concentrate leverage in high-conviction recovery setups - periods where a meaningful market pullback has already occurred and momentum signals a return to equities. Across the strategies that use it, the leveraged versions hold leverage roughly one month in four or five, and their average exposure over every month is about 1.1× to 1.4×.

Historical track record

The historical results have been compelling, but not perfect. Across the 3× tiers of Global Navigator, Triad, Carrier and Catalyst there have been 62 deployments. 43 of them beat the unleveraged version of the same strategy over the same months. The winners lasted about eight and a half months on average; the losers about three, because a weak recovery usually loses its momentum quickly and Smart Leverage exits. Every deployment that ran the full thirteen months was a winner. For Global Navigator 300, 8 of 10 deployments beat staying unleveraged.

What Smart Leverage is not

Smart Leverage is not a guarantee. Leverage amplifies both gains and losses - if the market continues to fall after deployment, the impact is magnified compared to holding the unleveraged fund. No rule works every time. Anyone using a leveraged strategy variant should be comfortable with the possibility of outsized drawdowns during the periods when leverage is active.

The leveraged variants have recorded deeper maximum drawdowns than their unleveraged parents. The difference has ranged from about one point for Global Navigator 300, whose leverage has almost never been on during a major decline, to about thirteen points for Catalyst 300. Pick the tier whose worst case you could live with.

Which strategies use Smart Leverage?

Ten: Global Navigator 200 and 300, LT Gain 200 and 300, Triad 135 and 170, Carrier 170 and 240, and Catalyst 200 and 300.

The three-digit number in a strategy's name indicates its maximum total notional leverage - Triad 135 can reach 135%, Global Navigator 300 can reach 300%. Some strategies carry such a number without running the overlay themselves. Calculated Risk 150, 185 and 250 are portfolios of other strategies, and their leverage comes from the leveraged components they hold rather than from their own Smart Leverage instance.

If you pull up a strategy on the Strategy View page, you can see the maximum and average leverage positions by strategy at the bottom of the ALLOCATIONS & CONTRIBUTIONS section.