Why holding a leveraged ETF is bad?
The Bottom Line
Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself.
There is a heightened degree of market risk associated with levered ETFs. Seeking to multiply the daily returns of a benchmark index, meaning both profits and losses are amplified. In the event the market does not provide steady direction, leveraged ETFs often miss out on potential gains.
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 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.
Leveraged ETFs decay due to the compounding effect of daily returns, volatility of the market and the cost of leverage. The volatility drag of leveraged ETFs means that losses in the ETF can be magnified over time and they are not suitable for long-term investments.
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.
As should be clear by now, leveraged ETFs are not meant for long-term investing. If you want to enter a short position on the NASDAQ, here are your options: Short the index directly (though you need to keep an eye on risk and margin to avoid margin calls, as bear market rallies are very real and very vicious)
Leveraged ETFs are risky investments. The two major risks associated with leveraged ETFs are decay and high volatility. High volatility translates to high risk. Decay emanates from holding the ETFs for long periods.
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.
Is QQQ a leveraged ETF?
TQQQ, also known as Proshares Ultrapro QQQ, is one of the largest leveraged ETFs that tracks the Nasdaq-100 index. TQQQ is typically used by day traders because it was built for short-holding periods. TQQQ's objective is to deliver triple the daily returns of the.
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.
| ETF (ticker) | Leverage Factor |
|---|---|
| ProShares UltraPro QQQ (TQQQ) | 3x |
| Direxion Daily Semiconductor Bull 3X Shares (SOXL) | 3x |
| ProShares Ultra S&P 500 (SSO) | 2x |
| Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF) | 3x |
While the Fund has a daily investment objective, you may hold Fund shares for longer than one day if you believe it is consistent with your goals and risk tolerance. For any holding period other than a day, your return may be higher or lower than the Daily Target. These differences may be significant.
Re: Investing 100% into TQQQ
The biggest risk is a sideways choppy market. You will get killed from the volatility in that environment. And that environment is just as likely as far as anyone can predict as an upward or downward market.
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.
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.
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.
While the Fund has a daily investment objective, you may hold Fund shares for longer than one day if you believe it is consistent with your goals and risk tolerance. For any holding period other than a day, your return may be higher or lower than the Daily Target. These differences may be significant.
Direxion launched its first leveraged ETFs in 2008. In November 2008 the company was the first to offer ETFs with 3X leverage, a move that was copied some months later by its competitors ProShares and Rydex Investments.
Which is better 3x or 2x leveraged ETF?
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.
Maintaining a constant leverage ratio allows the fund to immediately reinvest trading gains. This constant adjustment, called rebalancing, is how the fund is able to provide double the exposure to the index at any point in time, even if the index has recently gained 50% or lost 50%.
Overall, QQQ can be a good long-term investment as part of a larger portfolio.
"Leveraged and inverse funds generally aren't meant to be held for longer than a day, and some types of leveraged and inverse ETFs tend to lose the majority of their value over time," Emily says.
ProShares UltraPro QQQ TQQQ
ProShares UltraPro QQQ is the most popular and liquid ETF in the leveraged space, with AUM of $11.4 billion and an average daily volume of 172.7 million shares a day.
