,
1.22K
Follower
s
Summary
- TQQQ has provided investors stellar capital growth over the years.
- With leveraged tech-heavy exposure, prospective investors can expect lots of volatility.
- Hedge your bets with SQQQ and periodic rebalancing.
- The key is to pick an asset allocation that works for you.
Main Thesis
In this article we take a look at two popular leveraged equity ETFs and break down how they can be an effective way of quickly building wealth without taking on undue risk. The strategies discussed in this piece do not 100% shield you from capital loss and are not meant to be used by conservative investors that need capital preservation.
Fund Overview
(Source: ProShares)
The ProShares UltraPro QQQ ETF (NASDAQ:TQQQ) tracks the tech-heavy Nasdaq cubes index. Utilizing index swaps, the fund seeks a 3X leveraged daily return of the underlying index. While adding leverage to an already volatile category of equities is a risky proposition, the added leverage has other considerations as well. The two biggest are the high expense ratio and leverage decay. In today's era of ultra low cost investing, the .95% ratio takes a chunk of your annual returns. Leverage decay is a natural and unfortunate loss of capital due to volatile movements.
Here is a mathematical example:
Day 1 - Down 10% to $90 per share (assuming a cost basis of $100)
Day 2 - Up 10% to $99 per share
Day 3 - Down 5% to $94.05 per share
Day 4 - Up 5% to $98.75 per share
Decay is an unfortunate reality of investing in ETFs such as TQQQ but I'm not ready to write it off as junk yet. The question is how to efficiently hedge your bets against drops in the market.
Enter SQQQ
(Source: Tradingview)
The ProShares UltraPro Short QQQ (NASDAQ:SQQQ) provides inverse 3X exposure to the cubes index and is designed to be used as a tool to hedge or speculate market movements. While I do not recommend long-term buy and hold of this position, it can be a very effective way of hedging against market drawdowns. From peak to trough during the Covid crisis, TQQQ depreciated ~69% while SQQQ grew ~102%.
The significance of this is that having exposure to SQQQ in a market selloff will allow you to book your profits on your short position and reinvest the proceeds in TQQQ. Of course, this strategy is not perfect and doesn't shield you from losses completely. But it can be an efficient way of being patient with the market without having to continually buy put options.
Should you sell TQQQ calls?
As a rather volatile investment vehicle, TQQQ calls and puts are correspondingly rather expensive and can be lucrative when used in the right way. In normal market conditions, I don't recommend selling near-money calls because of its propensity of delivering capital growth quickly. In other words, you'll find that selling calls caps your profits and the call premium becomes a wash if you have to buy SQQQ puts. In bear markets, selling out of the money (OTM) calls can be a good way of generating some alpha out of your long position and staying patient in anticipation of a rebound.
Future Expectations
While the current economy is admittedly rather fragile, equities have been booming. Indeed, some may argue that there's a disconnect between stock market performance and economic KPI's such as corporate profits and consumer spending. The time may be right for a healthy correction. Notwithstanding the uncertain economic backdrop, the stay at home orders should continue to be a boon to Big Tech and perhaps harmful to equity REITS (aside from a short squeeze).
Conclusion
I think the key takeaway is to pick an asset allocation that works for you and fits your goals/risk tolerance. While getting exposure to both long and short leverage positions does not shield you from losses in a bear market (or even a sideways market), it's an alternative investment strategy that can certainly provide outsized returns very quickly.
This article was written by
My goal is to find tax-efficient investments that can help people achieve their financial goals. I believe that you can achieve superior risk-adjusted returns without having to take on undue risk.
Analyst’s Disclosure: I am/we are long TQQQ, SQQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
These investments products are very volatile and should be considered alternative investments. Please carefully read the prospectus and do your due diligence.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Disagree with this article?
To report a factual error in this article, .
Your feedback matters to us!
About SQQQ ETF
The article delves into leveraged equity ETFs, particularly the ProShares UltraPro QQQ ETF (TQQQ) and ProShares UltraPro Short QQQ (SQQQ), both tied to the Nasdaq cubes index. These ETFs offer leveraged exposure to tech-heavy equities, aiming for 3X daily returns inversely related to each other.
TQQQ magnifies gains but also amplifies risks due to leverage and volatility inherent in tech stocks. Its 3X leveraged daily return is based on the Nasdaq index, with the downside of a high expense ratio (.95%) and leverage decay.
Conversely, SQQQ inversely mirrors the Nasdaq index with 3X leverage, allowing investors to hedge against market downturns. During bear markets, SQQQ can yield profits while TQQQ may face declines, enabling reinvestment in TQQQ after booking profits.
The article addresses trading strategies, including the caution against long-term holding of SQQQ due to its inverse nature. It also touches on the potential profitability of selling options on TQQQ, highlighting their expensive nature but potential in bear markets.
Moreover, the author hints at market expectations, suggesting a potential correction despite the ongoing boom in equities, particularly in Big Tech due to stay-at-home orders.
Finally, the article emphasizes the importance of aligning investment strategies with individual risk tolerance and goals, acknowledging that these leveraged ETFs don't offer complete protection against losses.
The writer's disclosure about holding positions in both TQQQ and SQQQ underlines their firsthand experience with these investments, affirming their insights into the risks and rewards associated with these leveraged ETFs.
For someone seeking tax-efficient investments that aim for superior risk-adjusted returns without exposing themselves to excessive risk, these leveraged ETFs could serve as alternative investment avenues. However, it's crucial to conduct thorough due diligence, consider tax implications, and align these strategies with individual financial objectives and risk tolerance.
