7 ms·

TQQQ is up 7,298% in 10 years – you don’t want it (2020)

45 points by mgh2 5y ago

radicaldreamer 5y ago
Depends on your age, if you're young, you do want it because your risk tolerance should (in most cases) be much higher than someone who is close to retirement.
- User23 5y ago
  Risk tolerance is all well and good and I agree with you there, but you want the risk adjusted rate of return to be favorable, which it isn't for buying and holding geared ETFs[1]. Highlight quote: "It is mathematically impossible to create a fund that makes a continuous offering of its shares and consistently delivers for all its shareholders a stated multiple of a benchmark over time." [1] https://www.proshares.com/faqs/geared_investing_faqs.html https://www.proshares.com/faqs/geared_investing_faqs.html
  - dannyw 5y ago
    No, investing isn't all about optimising for sharpe ratios. For individual investors sometimes you do want a higher CAGR even at a worse risk adjusted return.
    - User23 5y ago
      You’re not wrong, but that reduces to sometimes you want to win the lottery. Sure, that’s great if it happens for you.
- rahimiali 5y ago
  Can you explain why you prefer TQQQ over buying LEAPs on QQQ? The spread on the latter seem ok, the leverage factor is under your control, and volatility drag does not reduce your returns (though implied volatility causes fluctuations). I don’t quite understand the market for TQQQ.
  - xhrpost 5y ago
    Not everyone has the ability to buy options in their 401k. Most IRAs don't have it without permission. Timing, take a look at Nov 07, had you bought a leap then, it would have taken until Jan 11 to just break even, you're really pushing the limit of the max option expiry at that point. All ITM leaps have extrinsic value, even if small. Take this value and divide by the strike price, this is your effective "interest" for not having to spend those dollars to purchase. Depending on your delta, this percentage could be higher than the expense ratio of TQQQ. Or just buy leaps on TQQQ then :)
Bostonian 5y ago
You cannot borrow money an IRA. I wonder if that justifies the use of a 2-beta S&P 500 ETF such as SPUU in an IRA for the most aggressive investors. The S&P 500 is more diversified than the Nasdaq 100 and should have higher risk-adjusted returns in the long run.
deleted 5y ago
[deleted]
jayzalowitz 5y ago
Honestly, only if you think there will be day to day volatility as to up down or a huge crash day. In only go up or only go down situations it performs well.
Kranar 5y ago
In Canada we have a tax free savings account that lets you invest about 6-10k a year entirely tax free (it varies from year to year). The issue is that it does not allow you to leverage your investment or use margin. So to get around that every year I dump my entire 7k into TQQQ and UPRO 50/50 and have done so since 2013. I don't see why this would be a bad idea and this article seems to be fairly poorly written. In general there is nothing wrong with putting some of your capital in a tax advantaged account into a leveraged ETF. No one is suggesting to dump all your savings into it, but putting some ratio of your earnings into a leveraged ETF allows you to indirectly maximize your contributions. I'd definitely prefer to use margin directly through my broker, it would be cheaper and less risky than an ETF, but the law is not setup to allow me to do so in the various retirement or tax advantaged accounts, so instead I use this as an alternative. For ordinary investment I think using some leverage is smart, especially if you're younger. Take something along the lines of 2-2.5x leverage until you're in your 40s, then start scaling it back as you get closer to retirement age.
- JumpCrisscross 5y ago
  Leveraged ETFs, which aim to deliver leveraged intraday returns, don't mirror a leveraged position over the long term [1]. In particular, the more volatile the market, the worse the leveraged ETF's returns will be. [1] https://www.montereyherald.com/2021/06/30/steven-merrell-financial-planning-why-leveraged-etfs-may-not-be-what-they-seem/ https://www.montereyherald.com/2021/06/30/steven-merrell-fin...
  - Kranar 5y ago
    Of course not, hence why I said I would in principle prefer to use leverage directly. But as the laws do not permit me to do so in tax advantaged accounts, leveraged funds are the next best thing. But I certainly would not use a leveraged ETF outside of such an account, it's both cheaper and less risky to use leverage directly from your broker. Do you know if U.S. retirement accounts allow the use of leverage? I am aware of Roth accounts and perhaps some other types of accounts that Americans can use that are tax advantaged. Do they allow margin accounts?
sabujp 5y ago
No you do want it, but not to buy and hold for months at a time, you should buy and hold for a few days and then get out after it peaks. You also want SOXL, FAS, UPRO/SPXL, URTY/UWM and TMF and want to operate on these the same way. The key is to know when to buy and sell these. The easiest is to use Price Headley's acceleration or Bollinger bands. Buy when the price falls out of the band, wait for a green candle on the daily and go in big, the next day might be red but you will be positive after a day or two. Sell when it hits the top of the band and there's a red candle.
- elil17 5y ago
  Trying to time the market is all or at least mostly luck and adds a lot of risk.
- rthomas6 5y ago
  After reading A Random Walk on Wall Street I have no faith in technical analysis. Do you have any broad empirical data that backs up these claims?
  - sabujp 5y ago
    I've been doing it just fine since 2004. Risk management is a large part too, you have to know when to cut your losses, how much to put in, when to average down, etc.
    - NicoJuicy 5y ago
      That's no different without TA.
- georgyo 5y ago
  If such a simple algorithm worked reliably then you would not want to advertise it because then it would not work any more.
  - syspec 5y ago
    Two economists are walking down the street and seeing a $20 bill lying on the sidewalk. The first economist says, "Look at that $20 bill." The second says, "That can't really be a $20 bill lying there, because if it were, someone would have picked it up already."
initplus 5y ago
The true risk of leveraged ETF's like TQQQ is not so much the risk of large losses in a downturn, but rather that under extreme market conditions the fundamental mechanism that powers the ETF will break down in some unexpected way. These leveraged funds are made up of complex derivatives, if the funds counterparties (UBS, Goldman, Societe Generale etc.) are unable to make good on their existing trades with proshares, or refuses to allow proshares to open new derivative positions it spells trouble for TQQQ and other leveraged ETF's. In a 2008 style scenario funds like TQQQ would be hit particularly hard by 1. leveraged exposure to crashing markets and 2. bankrupt counterparties going bad on TQQQ's swaps. See https://www.proshares.com/media/prospectus/tqqq_summary_prospectus.pdf https://www.proshares.com/media/prospectus/tqqq_summary_pros...
- xhrpost 5y ago
  This. I'm so tired of so many comments on Reddit that go something like "Exchange circuit breakers stop trading if a major index drops 15%, this would be 45% with 3x leverage meaning it's impossible for the ETF to hit zero." This is false for the reasons you mention above and has happened to leveraged ETFs in the past. No one seems to care though.
  - billylindeman 5y ago
    I think in general people don't understand counter party risk
- Kranar 5y ago
  I respect your position and certainly there is risk, but the intraday risk is not significantly greater than leveraging the index itself. For one, no complex derivatives are being used, you can see the exact summary of every asset held by the ETF here: https://accounts.profunds.com/etfdata/ByFund/TQQQ-psdlyhld.csv https://accounts.profunds.com/etfdata/ByFund/TQQQ-psdlyhld.c... They consist of the securities themselves, futures contracts, treasury bills, and index swaps. None of these are considered remotely complex or out of the ordinary and the only security that has any real counterparty risk are the index swaps. So yes, if Goldman Sachs, or JP Morgan, or one of the other nine institutions listed in the above linked document fail in such a way that no other institution bails them out, then TQQQ's price will fall greater than 3x index it's tracking. I won't argue those institutions can not fail, but that's the case when you invest, you assume the risk that what you invest in will fail. The greatest risk of investing in TQQQ is not the counterparty risk or that the fundamental mechanism behind index swaps will break down, that's a risk but it's much less likely than the elephant in the room... being leveraged in an investment during a stock market crash.
neonate 5y ago
https://archive.md/WCUaT https://archive.md/WCUaT
throwawaytqqq 5y ago
I’m 39. My Roth IRA recently passed $1M mostly because of a buy and hold tqqq strategy beginning in 2014. The only time I sold was in Feb 2020 just before COVID and rebought in May of 2020 for the wild ride up. High risk. High reward. I’m normally a very down the fairway Full market etf investor. But with the Roth i wanted to take a bit of a gamble. And it’s paid off. That said, the possibility of an XIV moment is very real. Not for the faint of heart by any means.
- sabujp 5y ago
  that's great, and you did the right thing by being aware of external factors and pulling out before the pandemic!
- dannyw 5y ago
  Similar situation. All the articles about TQQQ is like everyone telling people to not buy bitcoon in 2013, 2015, 2018, etc. Yes, I get TQQQ has significant risks, including the risk of going to zero. So what? It's not my only holding. It's a modest allocation.
- albatrosstrophy 5y ago
  Couldn't find the answer on Google. What's an XIV moment? I know it's something bad but what's the origin of the phrase.
  - rahimiali 5y ago
    I didn’t know the reference either, but maybe this article explains the event: https://towardsdatascience.com/the-xiv-meltdown-1b0608110b9f https://towardsdatascience.com/the-xiv-meltdown-1b0608110b9f
  - xhrpost 5y ago
    It's a VIX inverse ETN that collapsed a few years ago. Lot of people got burned.
lvl100 5y ago
You’re 1000% better off leveraging via futures and/or options. TQQQ is a scam.
WheelsAtLarge 5y ago
Tqqq is a derivative of the the Nasdaq-100 Index. The danger of Tqqq is that it will fall towards 0 if the index starts to move sideways for a long time or it falls for a considerable amount of time. If the market dives for a short period and recovers then it will recover along with the rest of the market. Percentage wise it will fall deeper than the index but compounding will eventually bring it back to profitability. It's not for the faint of heart since even in a relatively small downturn it falls hard. During the last index downturn there was a day in which tqqq fell over 9% and kept on going down but now it's recovered and it hit a new 52 week high. The fund is a high risk high reward investment. I would not avoid it but I would invest the high risk portion of your investment funds and hold it until retirement. It should be small enough so that it does not impact your finances if it suddenly goes to 0. I don't think you should avoid it but you need to be very careful on how much money you invest in it since you can lose it all.

45 points by mgh2 5y ago

Depends on your age, if you're young, you do want it because your risk tolerance should (in most cases) be much higher than someone who is close to retirement.

User23 5y ago
Risk tolerance is all well and good and I agree with you there, but you want the risk adjusted rate of return to be favorable, which it isn't for buying and holding geared ETFs[1]. Highlight quote: "It is mathematically impossible to create a fund that makes a continuous offering of its shares and consistently delivers for all its shareholders a stated multiple of a benchmark over time." [1] https://www.proshares.com/faqs/geared_investing_faqs.html https://www.proshares.com/faqs/geared_investing_faqs.html
- dannyw 5y ago
  No, investing isn't all about optimising for sharpe ratios. For individual investors sometimes you do want a higher CAGR even at a worse risk adjusted return.
  - User23 5y ago
    You’re not wrong, but that reduces to sometimes you want to win the lottery. Sure, that’s great if it happens for you.
rahimiali 5y ago
Can you explain why you prefer TQQQ over buying LEAPs on QQQ? The spread on the latter seem ok, the leverage factor is under your control, and volatility drag does not reduce your returns (though implied volatility causes fluctuations). I don’t quite understand the market for TQQQ.
- xhrpost 5y ago
  Not everyone has the ability to buy options in their 401k. Most IRAs don't have it without permission. Timing, take a look at Nov 07, had you bought a leap then, it would have taken until Jan 11 to just break even, you're really pushing the limit of the max option expiry at that point. All ITM leaps have extrinsic value, even if small. Take this value and divide by the strike price, this is your effective "interest" for not having to spend those dollars to purchase. Depending on your delta, this percentage could be higher than the expense ratio of TQQQ. Or just buy leaps on TQQQ then :)

Bostonian 5y ago

You cannot borrow money an IRA. I wonder if that justifies the use of a 2-beta S&P 500 ETF such as SPUU in an IRA for the most aggressive investors. The S&P 500 is more diversified than the Nasdaq 100 and should have higher risk-adjusted returns in the long run.

deleted 5y ago

[deleted]

jayzalowitz 5y ago

Honestly, only if you think there will be day to day volatility as to up down or a huge crash day. In only go up or only go down situations it performs well.

Kranar 5y ago

In Canada we have a tax free savings account that lets you invest about 6-10k a year entirely tax free (it varies from year to year). The issue is that it does not allow you to leverage your investment or use margin. So to get around that every year I dump my entire 7k into TQQQ and UPRO 50/50 and have done so since 2013. I don't see why this would be a bad idea and this article seems to be fairly poorly written. In general there is nothing wrong with putting some of your capital in a tax advantaged account into a leveraged ETF. No one is suggesting to dump all your savings into it, but putting some ratio of your earnings into a leveraged ETF allows you to indirectly maximize your contributions. I'd definitely prefer to use margin directly through my broker, it would be cheaper and less risky than an ETF, but the law is not setup to allow me to do so in the various retirement or tax advantaged accounts, so instead I use this as an alternative. For ordinary investment I think using some leverage is smart, especially if you're younger. Take something along the lines of 2-2.5x leverage until you're in your 40s, then start scaling it back as you get closer to retirement age.

JumpCrisscross 5y ago
Leveraged ETFs, which aim to deliver leveraged intraday returns, don't mirror a leveraged position over the long term [1]. In particular, the more volatile the market, the worse the leveraged ETF's returns will be. [1] https://www.montereyherald.com/2021/06/30/steven-merrell-financial-planning-why-leveraged-etfs-may-not-be-what-they-seem/ https://www.montereyherald.com/2021/06/30/steven-merrell-fin...
- Kranar 5y ago
  Of course not, hence why I said I would in principle prefer to use leverage directly. But as the laws do not permit me to do so in tax advantaged accounts, leveraged funds are the next best thing. But I certainly would not use a leveraged ETF outside of such an account, it's both cheaper and less risky to use leverage directly from your broker. Do you know if U.S. retirement accounts allow the use of leverage? I am aware of Roth accounts and perhaps some other types of accounts that Americans can use that are tax advantaged. Do they allow margin accounts?

sabujp 5y ago

No you do want it, but not to buy and hold for months at a time, you should buy and hold for a few days and then get out after it peaks. You also want SOXL, FAS, UPRO/SPXL, URTY/UWM and TMF and want to operate on these the same way. The key is to know when to buy and sell these. The easiest is to use Price Headley's acceleration or Bollinger bands. Buy when the price falls out of the band, wait for a green candle on the daily and go in big, the next day might be red but you will be positive after a day or two. Sell when it hits the top of the band and there's a red candle.

elil17 5y ago
Trying to time the market is all or at least mostly luck and adds a lot of risk.
rthomas6 5y ago
After reading A Random Walk on Wall Street I have no faith in technical analysis. Do you have any broad empirical data that backs up these claims?
- sabujp 5y ago
  I've been doing it just fine since 2004. Risk management is a large part too, you have to know when to cut your losses, how much to put in, when to average down, etc.
  - NicoJuicy 5y ago
    That's no different without TA.
georgyo 5y ago
If such a simple algorithm worked reliably then you would not want to advertise it because then it would not work any more.
- syspec 5y ago
  Two economists are walking down the street and seeing a $20 bill lying on the sidewalk. The first economist says, "Look at that $20 bill." The second says, "That can't really be a $20 bill lying there, because if it were, someone would have picked it up already."

initplus 5y ago

The true risk of leveraged ETF's like TQQQ is not so much the risk of large losses in a downturn, but rather that under extreme market conditions the fundamental mechanism that powers the ETF will break down in some unexpected way. These leveraged funds are made up of complex derivatives, if the funds counterparties (UBS, Goldman, Societe Generale etc.) are unable to make good on their existing trades with proshares, or refuses to allow proshares to open new derivative positions it spells trouble for TQQQ and other leveraged ETF's. In a 2008 style scenario funds like TQQQ would be hit particularly hard by 1. leveraged exposure to crashing markets and 2. bankrupt counterparties going bad on TQQQ's swaps. See https://www.proshares.com/media/prospectus/tqqq_summary_prospectus.pdf https://www.proshares.com/media/prospectus/tqqq_summary_pros...

xhrpost 5y ago
This. I'm so tired of so many comments on Reddit that go something like "Exchange circuit breakers stop trading if a major index drops 15%, this would be 45% with 3x leverage meaning it's impossible for the ETF to hit zero." This is false for the reasons you mention above and has happened to leveraged ETFs in the past. No one seems to care though.
- billylindeman 5y ago
  I think in general people don't understand counter party risk
Kranar 5y ago
I respect your position and certainly there is risk, but the intraday risk is not significantly greater than leveraging the index itself. For one, no complex derivatives are being used, you can see the exact summary of every asset held by the ETF here: https://accounts.profunds.com/etfdata/ByFund/TQQQ-psdlyhld.csv https://accounts.profunds.com/etfdata/ByFund/TQQQ-psdlyhld.c... They consist of the securities themselves, futures contracts, treasury bills, and index swaps. None of these are considered remotely complex or out of the ordinary and the only security that has any real counterparty risk are the index swaps. So yes, if Goldman Sachs, or JP Morgan, or one of the other nine institutions listed in the above linked document fail in such a way that no other institution bails them out, then TQQQ's price will fall greater than 3x index it's tracking. I won't argue those institutions can not fail, but that's the case when you invest, you assume the risk that what you invest in will fail. The greatest risk of investing in TQQQ is not the counterparty risk or that the fundamental mechanism behind index swaps will break down, that's a risk but it's much less likely than the elephant in the room... being leveraged in an investment during a stock market crash.

neonate 5y ago

https://archive.md/WCUaT https://archive.md/WCUaT

throwawaytqqq 5y ago

I’m 39. My Roth IRA recently passed $1M mostly because of a buy and hold tqqq strategy beginning in 2014. The only time I sold was in Feb 2020 just before COVID and rebought in May of 2020 for the wild ride up. High risk. High reward. I’m normally a very down the fairway Full market etf investor. But with the Roth i wanted to take a bit of a gamble. And it’s paid off. That said, the possibility of an XIV moment is very real. Not for the faint of heart by any means.

sabujp 5y ago
that's great, and you did the right thing by being aware of external factors and pulling out before the pandemic!
dannyw 5y ago
Similar situation. All the articles about TQQQ is like everyone telling people to not buy bitcoon in 2013, 2015, 2018, etc. Yes, I get TQQQ has significant risks, including the risk of going to zero. So what? It's not my only holding. It's a modest allocation.
albatrosstrophy 5y ago
Couldn't find the answer on Google. What's an XIV moment? I know it's something bad but what's the origin of the phrase.
- rahimiali 5y ago
  I didn’t know the reference either, but maybe this article explains the event: https://towardsdatascience.com/the-xiv-meltdown-1b0608110b9f https://towardsdatascience.com/the-xiv-meltdown-1b0608110b9f
- xhrpost 5y ago
  It's a VIX inverse ETN that collapsed a few years ago. Lot of people got burned.

lvl100 5y ago

You’re 1000% better off leveraging via futures and/or options. TQQQ is a scam.

WheelsAtLarge 5y ago

Tqqq is a derivative of the the Nasdaq-100 Index. The danger of Tqqq is that it will fall towards 0 if the index starts to move sideways for a long time or it falls for a considerable amount of time. If the market dives for a short period and recovers then it will recover along with the rest of the market. Percentage wise it will fall deeper than the index but compounding will eventually bring it back to profitability. It's not for the faint of heart since even in a relatively small downturn it falls hard. During the last index downturn there was a day in which tqqq fell over 9% and kept on going down but now it's recovered and it hit a new 52 week high. The fund is a high risk high reward investment. I would not avoid it but I would invest the high risk portion of your investment funds and hold it until retirement. It should be small enough so that it does not impact your finances if it suddenly goes to 0. I don't think you should avoid it but you need to be very careful on how much money you invest in it since you can lose it all.