What is Smart Leverage, and how does it work?

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 is IWB specifically.

Only then does the substitution happen:

• 2× strategies (Global Navigator 200, LT Gain 200, Triad 135) enter SSO, a 2× S&P 500 ETF.
• 3× strategies (Global Navigator 300, LT Gain 300, Triad 170) enter UPRO, a 3× S&P 500 ETF.

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.

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.

The exit rule

A live deployment ends on whichever of these comes first:

• The 12-month cap is reached. Deployments are capped at twelve 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.

One trigger, one deployment

This is the rule most often misread. Once a deployment ends, for any of the three reasons above, the original drawdown is spent. If momentum flips favorable again the very next month, Smart Leverage does not redeploy. Only a fresh 10% drawdown in IWB can arm it again.

The spec's diagnostic case is April 1981: IWB was beating cash, the strategy was in equities, and Smart Leverage stayed on the sidelines because the drawdown that had armed it earlier was already used up.

A note on taxes

The 12-month cap is deliberately set where it is partly with taxable accounts in mind, since a longer hold is more likely to reach favorable long-term treatment than rapid in-and-out trading. Treat that as a design leaning, not a promise - the IRS long-term test requires holding more than one year, and a position closed at the twelve-month cap sits right at that boundary. 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.

Historical track record

The historical results have been compelling. For Global Navigator, only one of its Smart Leverage periods produced a worse outcome than staying unleveraged would have.

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. The historical win rate is high, but 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.

To date, the Smart Leverage variants have not recorded deeper maximum drawdowns than their unleveraged parents. That is a historical observation, not a property of the design, and it may not hold in future.

Which strategies use Smart Leverage?

Six: Global Navigator 200 and 300, LT Gain 200 and 300, and Triad 135 and 170.

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 229 and Calculated Risk 288 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.