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Portfolio Leverage: a Silver Lining for Low Rates

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Portfolio Leverage: a Silver Lining for Low Rates For UBS marketing purposes One silver lining of low interest rates is that investors have an opportunity to lock in some of the lowest borrowing costs in history. (UBS) Investing Insights Portfolio leverage: A silver lining for low rates 23 July 2021, 3:27 pm CEST, written by UBS Editorial Team Low interest rates are likely to be a headwind for investors in many ways, but they are a tailwind to borrowing strategies. The UBS Chief Investment Office shares insights and next steps to help you improve your portfolio return using leverage. Bond yields and interest rates are at almost inconceivably low levels. In many ways, low interest rates are a headwind for investors. For example, replacing income in retirement has rarely been more expensive, and safe investments like cash and Treasuries are unlikely to maintain their purchasing power in the long term. One silver lining of low interest rates is that investors have an opportunity to lock in some of the lowest borrowing costs in history—a tailwind for a range of strategies that can enhance liquidity and return potential. Applying a modest amount of portfolio leverage can help you to improve your portfolio return, while maintaining the benefits of diversification, resulting in a potential advantage versus simply increasing the risk of your portfolio. When we consider leverage as an alternative to increasing the portfolio allocation to stocks and other risk assets, it's clear that—especially at low interest rates like we see in today's market—portfolio leverage can often be the best option for enhancing your expected returns and achieving your goals. In addition to enhancing portfolio return potential, borrowing strategies can also help you to limit capital gains taxes and reduce the drag on returns from your cash holdings. It's unlikely that interest rates will remain this low for long. Short-term interest rates are expected to climb substantially in the years ahead as a strengthening economy gives the Federal Reserve and other central banks confidence that they can begin removing monetary stimulus. Although we expect this rate rise to be gradual, interest rates may start to rise more quickly if the economy outperforms expectations, if inflation pressures continue to build, or if Congress is able to pass a large fiscal stimulus package. For UBS marketing purposes Consider these next steps as you think about how these insights might apply to your family's objectives: • Speak with your financial advisor about your borrowing capacity and the interest rate available for a securities-backed credit line tied to your portfolio. • If you are planning to tap into your borrowing capacity, ask your financial advisor whether a fixed-rate loan makes sense for you. • Speak with your tax advisor about whether you could deduct the interest on an investment loan from your taxable investment income. • Consider whether borrowing might help you fund your spending without realizing capital gains taxes, keeping your portfolio generating growth and income. • When seeking a higher return, consider portfolio leverage as an alternative to shifting your allocation from bonds to stocks and other risk assets. Visit ubs.com/leverage to find resources on this topic, including the report How leverage can be the best option to enhance returns and achieve your goals 22 July 2021. The website provides an interactive digital experience and includes an interactive video where we explain each element in detail. Main contributors: Daniel J. Scansaroli, Justin Waring, and Leslie Falconio This content is a product of the UBS Chief Investment Office. Important information As a firm providing wealth management services to clients, UBS Financial Services, Inc is registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker- dealer, offering both investment advisory and brokerage services. Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that you carefully read the agreements and disclosures UBS provides to you about the products or services offered. For more information, please visit our website at www.ubs.com/workingwithus. © UBS 2021. All rights reserved. UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC. There are two sources of UBS research. Reports from the first source, UBS CIO Global Wealth Management, are designed for individual investors and are produced by UBS Global Wealth Management (which includes UBS Financial Services Inc. and UBS International Inc.). The second research source is UBS Group Research, whose primary business focus is institutional investors. The two sources operate independently and may therefore have different recommendations. The various research content provided does not take into account the unique investment objectives, financial situation or particular needs of any specific individual investor. If you have any questions, please consult your Financial Advisor. UBS Financial Services Inc. is a subsidiary of UBS AG and an affiliate of UBS International Inc..
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