Are 3x ETFs safe?
A leveraged ETF uses derivative contracts to magnify the daily gains of an index or benchmark. These funds can offer high returns, but they also come with high risk and expenses. Funds that offer 3x leverage are particularly risky because they require higher leverage to achieve their returns.
Leveraged ETFs amplify daily returns and can help traders generate outsized returns and hedge against potential losses. A leveraged ETF's amplified daily returns can trigger steep losses in short periods of time, and a leveraged ETF can lose most or all of its value.
Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.
Leveraged Assets
The risks scale up faster than the leverage, with the 3x leveraged ETF showing more than four times the standard deviation of returns. Simultaneously, the returns scale up slower than the leverage, with the 2x ETF only outperforming by 26%, and the 3x ETF even lagging the unleveraged index.
In contrast, the riskiest ETF in the Morningstar database, ProShares Ultra VIX Short-term Futures Fund (UVXY), has a three-year standard deviation of 132.9. The fund, of course, doesn't invest in stocks. It invests in volatility itself, as measured by the so-called Fear Index: The short-term CBOE VIX index.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero. Before this happens, leveraged ETFs can undertake a reverse stock split, creating higher-priced shares but reducing the number of ETF units outstanding.
Because they rebalance daily, leveraged ETFs usually never lose all of their value. They can, however, fall toward zero over time. If a leveraged ETF approaches zero, its manager typically liquidates its assets and pays out all remaining holders in cash.
BMO has launched the first quadruple leveraged ETN fund that tracks the S&P 500. The fund will trade under the ticker symbol "XXXX" and seeks to generate four time the S&P 500's return on a daily basis. The launch come as bullishness rise among investors and Wall Street predicts more gains to come in 2024.
If qqq is down 33 percent then tqqq goes to zero. In 2000-2003 qqq was down 75% which almost guarantees tqqq going to zero. That's not how it works. TQQQ leverage resets daily, so a 33% drop in QQQ over say the span of a month does not mean TQQQ goes to zero.
The daily rebalancing of leveraged and inverse ETFs creates a situation that for periods longer than a day or two the return of a leveraged or inverse ETF will deviate from the margin account benchmark.
Is 3X leverage safe?
Key Takeaways
This also means 3x leveraged ETFs also will generate losses that are three times that of the index. It's also key to know that the return is expected on the daily return, not the annual return. 3x leveraged ETFs are often not considered wise long-term investments.
The Leverage Shares 5x Long US Tech 100 ETP Securities is designed to provide 5x the daily return of Invesco QQQ Trust (QQQ) stock, adjusted to reflect the fees and costs of maintaining a leveraged position in the stock.
If you own a leveraged ETF you can't lose more than your initial investment amount. You would never be liable for more than you invested; in a sense, the amount you could lose is capped.
Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.
Investors looking to weather a recession can use exchange-traded funds (ETFs) as one way to reduce risk through diversification. ETFs that specialize in consumer staples and non-cyclicals outperformed the broader market during the Great Recession and are likely to persevere in future downturns.
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
The SQQQ is meant to be held intraday and is not a long-term investment, where expenses and decay will quickly eat into returns. It is not appropriate as a long-term holding, even among bearish investors.
The reason for this is that the leveraged ETF is designed to provide multiple returns of the underlying asset on a daily basis. The compounding effect of daily returns means that losses in the ETF are magnified over time.
Historically, SQQQ decays around 7-8% per month, though this would likely be around 4-5% per month during a flat market such as that experienced so far this year.
Yes, when you use leverage (margin) in Forex trading, it is possible to lose more money than you have in your account. Leverage allows you to control a larger position with a smaller amount of capital.
What is the risk of Tqqq?
TQQQ has a draw down risk of -89.60%, which is the largest price decline experienced over the last three years. This fund has a three year standard deviation of 74.9%. This fund has experienced excessive volatility in its monthly performance over the last 36 months.
- LETFs can lead to significant losses that exceed the tracked index or assets.
- LETFs have higher fees and expense ratios compared with traditional ETFs.
- LETFs are not long-term investments.
ProShares UltraPro QQQ is the most popular and liquid ETF in the leveraged space, with AUM of $21.9 billion and an average daily volume of 67.3 million shares a day. The fund seeks to deliver three times the return of the daily performance of the NASDAQ-100 Index, charging investors 0.88% in annual fees.
TQQQ had an average daily trade volume of 111 million shares over the past 12 months, easily the highest trading volume in the leveraged ETF group.
If you'd invested back in October 2022 when the S&P 500 bottomed out, you'd have earned substantial returns by today. But hindsight is 20/20, and since you can't go back in time, your only options are to invest now or wait. Between those two options, investing now is almost always more lucrative.
