3 ms·

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 fundamenta

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.
- initplus 5y ago
  You say the swaps are the only component that has meaningful counterparty risk, it is worth noting that the swaps dwarf the other TQQQ holdings over 7:1.
  - deleted 5y ago
    [deleted]
  - Kranar 5y ago
    But that's not true and wouldn't even make sense. I literally link to the CSV file detailing every single holding they have down to the dollar. You can open it up in Excel/Google Sheets and immediately tally up the values. The swaps add up to 39325783771 and the other holdings add up to 25311807166. Even if you add in the futures contracts (NQZ1) you're still only at approximately 2:1 which is within the ballpark of what one would expect from a triple leveraged instrument. I'm not sure how you got 7:1 but given that all of the numbers are right there, you are welcome to provide your calculations.
    - initplus 5y ago
      Ah sorry that's my bad, honestly misread the last row as a total when it's actually just "NET OTHER ASSETS / CASH".

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.

initplus 5y ago
You say the swaps are the only component that has meaningful counterparty risk, it is worth noting that the swaps dwarf the other TQQQ holdings over 7:1.
- deleted 5y ago
  [deleted]
- Kranar 5y ago
  But that's not true and wouldn't even make sense. I literally link to the CSV file detailing every single holding they have down to the dollar. You can open it up in Excel/Google Sheets and immediately tally up the values. The swaps add up to 39325783771 and the other holdings add up to 25311807166. Even if you add in the futures contracts (NQZ1) you're still only at approximately 2:1 which is within the ballpark of what one would expect from a triple leveraged instrument. I'm not sure how you got 7:1 but given that all of the numbers are right there, you are welcome to provide your calculations.
  - initplus 5y ago
    Ah sorry that's my bad, honestly misread the last row as a total when it's actually just "NET OTHER ASSETS / CASH".