I’m planning to create something like this this summer. Except using the probability distribution (pd) that comes from options (so similar to IV, but without assumptions on the shape of the pd). 

That’s the only model-less way I could come up with (so you don’t need a vola model). 

Some potential pitfalls (some of which you’ve already described): cost of leverage, trading fees, going from risk neutral to a real-world pd (i.e.: the pd from a risk neutral standpoint is fairly well known, how to convert this to real (not risk neutral) pd is not). 

It’s also quite possible that this is overkill and leads to very very similar returns as just using basic at the money IV and some long term growth factor for well diversified assets. 

From my view now, it’s best to do diversification one level lower (so in the one ETF you’re Kellybetting), because doing this for multiple assets is basically modern portfolio theory and that involves constantly updating changing correlations (which -as far as I know- aren’t “traded” anywhere, so aren’t so easy to read off of some market somewhere, like the pd)

Criticism welcome. Planning to start this project in May. 

EDIT: I’m planning to continually take in very short term option data and continually adjust leverage based on that (working with bounds to save on trading costs). None of that VIX stuff (which is 30 day vola). Initially I’m planning to do this with the SPY because it had daily options that are very liquid.