TQQQ – The perfect ETF for a strong bull market
What is the TQQQ ETF? It is a leveraged ETF that returns a multiple of 3x return of QQQ (an ETF that holds the top 100 largest companies listed on the Nasdaq) on a daily basis. For example, if the QQQ goes up 1.2% in one day, TQQQ will go up 3 x 1.2% = 3.6%.
It seems that the general consensus among investors is that leveraged ETFs are a bad long-term investment mainly because these ETFs only multiply the return of the underlying daily. The implication of this is that there is a great deal of uncertainty over the long-term return of the leveraged ETF – there is no guarantee that the ETF multiplies the return of the underlying over longer periods of time.
The second main argument against leveraged ETFs is that due to the magnified movement of the underlying up and down, the math works against leveraged ETFs, causing them to lose value over time. For example, let’s say you put $1000 into the QQQ. It dips 3% one day, then gains 3% the next. At the end of the second day, you are left with $999.1. But, if you put $1000 into the TQQQ, it would dip 9% on the first day, and gain 9% the second day. But, you would only be left with $911.9.
People that support this point argue that this phenomenon causes the leveraged ETF to underperform the underlying in the long run, and, in many cases, even go down when the underlying goes up. Although there is some evidence to back this, a closer look at the historical returns of TQQQ and QQQ in green years would say otherwise.
Since TQQQ’s 2010 inception, it has out-performed QQQ in 2010, 2012, 2013, 2014, 2016, 2017, 2019, 2020. Since 2010, TQQQ is up 12,516.09%, while QQQ is only up a mere 677.3%. If you had put $1000 into both TQQQ and QQQ back in 2010, you would have $125,160 from TQQQ and $6,773 from QQQ. That means that the 3x leveraged ETF outperformed the QQQ by a factor of 18.5x, which is even better than the 3x positive return promised. Though, you might think that this is an unfair comparison because the same period where TQQQ was started was one of the longest and most intense bull markets (share prices are rising) in history.
But, let’s look at another leveraged ETF: the 2x leveraged $SSO, which aims to return 2x of $SPY, the S&P ETF. SSO was made back in June of 2006, right before the housing recession. SSO is currently up 523% since inception, while SPY is up 230%. They have both experienced the 2008 financial crisis and the 2020 covid 19 crash, and yet the 2x leveraged ETF is still up significantly. In fact, it still outperforms the 2x leveraged ratio, with an outperformance of 2.27x.
Since the fund started in 2010, it never went through the housing crisis, or worse, the 2000 tech bubble which obliterated the NASDAQ, which brings us to the third main argument: if the QQ dropped 33.33% or more in one day, TQQQ would have to shut down, and any money invested would be lost. This has happened with some other leveraged ETFs that don’t have the positive decay that the S&P, Dow Jones, and Nasdaq have (meaning, over the long term, the S&P, Dow, and Nasdaq go up). Fortunately, the exchanges have circuit breakers in effect. The worst that QQQ can drop in a day is 15% in one day. Therefore, the max that TQQQ can go down in one day is 45%, which is highly unlikely.
Fun Fact: If TQQQ and QQQ were around in the 90s, and if you invested $10,000 in both of them (without reinvesting):
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July 22, 2021 at 11:30AM