Investment Thesis
ProShares UltraPro QQQ ETF (NASDAQ:TQQQ) is a proven leveraged ETF that can help investors potentially beat the NASDAQ (NDX) over time. It's firmly grounded in fundamentally-sound companies based on underlying holdings in the NDX, as opposed to speculative growth companies in the ARK Innovation ETF (ARKK).
As a result, it gives investors much more confidence in riding the massive volatility (typically 3x the daily performance of the NDX). In addition, investors are assured that they are investing in reliable mega tech companies such as Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA), and Google (GOOGL) (GOOG). These companies have robust free cash flows, and strong competitive moats and are the critical leaders of their industries.
However, investors must be wary of its volatility. The recent tech bear should have given investors a clear taste of the importance of being nimble when exposed to the TQQQ. However, long-term investors who can handle the absolute downside volatility in the TQQQ may find it superior to the Invesco QQQ ETF (QQQ), given higher Sortino ratios.
In addition, we observed that the TQQQ is at a near-term bottom. We also believe that the bottom should hold. Therefore, investors can consider using the recent consolidation to layer in and add exposure. Our medium-term price target (PT) of $60 implies a potential upside of 86%, based on June 3's close.
TQQQ's Risk-Adjusted Returns Are Better Than The QQQ
Readers can glean that the TQQQ has proved its performance over the past five years, despite its massive fallout from its November highs. Its 5Y total return of 247.65% (CAGR: 28.27%) is well above the QQQ's 5Y return of 121.44% (CAGR: 17.21%). Furthermore, it's well above the ARKK's 5Y gain of 58.67% (CAGR: 9.66%), as Cathie Wood's flagship fund suffered a massive implosion.
However, investors must be prepared for massive volatility, given its 3x leveraged profile. But investors are urged to ignore the daily noise and focus on its price action, which we will discuss in the subsequent section.
Given its colossal upside and downside volatility, we urge investors to use the Sortino ratio to evaluate its risk-adjusted returns (adjusted for downside volatility) against the QQQ.
As seen above, TQQQ's average Sortino ratios over the past five and ten years surpassed the QQQ. However, the performance has narrowed lately, as seen in the second chart. But, investors are reminded that the NDX has sustained a tech bear market that saw it fall 31.5% from its November highs to its May lows. Notably, the TQQQ's six-month performance is hugely underwhelming, as it underperformed the ARKK and QQQ.
Therefore, investors are reminded that a prolonged bear market could impact its risk-adjusted returns significantly. That could markedly affect its risk-adjusted outperformance over the QQQ.
So, We Urge Investors To Be Nimble With The TQQQ
At its November highs, TQQQ saw a 5Y return of 1,579%. However, those gains have declined significantly, falling to 509%. As a result, we believe it's critical for investors to use price action to evaluate massive bull traps, like the double top bull trap seen in the November 2021 highs.
As seen above, the market rapidly drew in the final round of buyers in October/November before forming a double top bull trap in November. Such a bull trap marks a significant potential trend reversal from its upward bias. Consequently, the market started to distribute the gains until January 2022 before forcing the sell-off subsequently.
However, we also noted that the TQQQ could be at a near-term bottom, undergirded by a validated bear trap reversal signal. However, it's not a double bottom bear trap, which could have increased its reversal potency. Notwithstanding, we like the price action signal and believe it represents an attractive risk/reward profile based on our near- and medium-term PTs.
Is TQQQ ETF A Buy, Sell, Or Hold?
We rate TQQQ a Buy, with a near-term PT of $40 (an implied upside of 24.5%). Our medium-term PT of $60 suggests a potential upside of 86% based on June 3's close.
However, we urge investors to use an appropriate stop-loss risk management to protect against potential downside risk, given the lack of a double bottom bear trap.
Therefore, investors need to recognize that the downtrend bias remains intact, and it's critical to be prudent in their trade and position management when adding exposure to the TQQQ.
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