Tqqq Stock – A week ago I wrote about how SPXL, an ETF leveraged 3x of the S&P 500, for the long term (1 year) can be a viable strategy to beat the S&P 500 in many cases. I used historical daily data from the S&P 500 to simulate 3x leverage as SPXL went back to 1990. In summary, while SPXL outperformed the S&P 500 71% of the time, the other 29% of the time was extremely painful for the investor. the S&P 500 is already down nearly 50% in a year and the SPXL is down 90%.
I want to draw the same analysis to a cousin of SPXL, ProShares UltraPro QQQ (NASDAQ: TQQQ), which is a 3x leveraged ETF of the Invesco QQQ ETF (QQQ) that represents the NASDAQ-100 index. QQQ and TQQQ have grown in popularity over the past decade due to the rise of major technology in our products and also their resilience during the COVID-19 pandemic. The tech bubble of 2000 also presented a very interesting and important time to study leveraged ETFs like TQQQ where the underlying assets were at the heart of the bubble and the subsequent pop.
Instead of just looking back 1 year, I also want to analyze a longer waiting period of 5 years. QQQ data goes back to 1999, which is right when the tech bubble started to grow and when I start my analysis. TQQQ was not created until 2011, after several long bear markets, so I rely on QQQ price data to compare TQQQ returns.
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Looking at 1-year forward returns, the results are similar for SPXL vs. The S&P 500 is back. Triple leverage generally helps TQQQ more than QQQ, although it depends on the investor’s timing. The best opportunities for investors in QQQ to exceed QQQ were at the beginning of the great bull run after a major market crash (2002 and 2009). But even if investors lost outright, TQQQ still outperformed QQQ during the secular bull markets of 2003 to 2007 and 2010 and beyond.
The best time for investors to invest in TQQQ was before the big start of the tech bubble in 1999. Investors would have more than 7x their investments in one year with TQQQ. but naked. 2x for QQQ. However, this will only work if investors time the market perfectly and stop investing before the 2000 tech bubble.
Throughout the broad bear market for technology stocks in 2000-2002, investors in QQQ lost about 50% per year. Investors in TQQQ lost 100% of their portfolio for three consecutive years. Likewise, in late 2007 to 2008, TQQQ investors had nearly 100% of their portfolios wiped out.
Instead of looking at market timing, which many investors find difficult to do, looking at the delta performance distribution between TQQQ and QQQ shows that TQQQ should succeed about two-thirds of the time (blue, 64%). The average over yield is 23%. The distribution has a very long tail, meaning that if the investor is lucky even with time, they can make a big impact (300%+).
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However, this is not without significant risk for investors. If we look at the unsuccessful part of the distribution (red, 36%), the most common result is success between 40% and 50%. This underperformance occurs even though QQQ is down significantly, and another 40%-50% year means your portfolio will be almost completely destroyed.
With ETFs and unquoted stocks, many investors follow the strategy of investing and holding strong positions for a long time in order to avoid market fluctuations and create wealth. One might think that this would work the same way for leveraged ETFs like TQQQ. However, due to the asymmetric effect of losses increasing more than gains, holding TQQQ for too long can have disastrous effects, especially as long as you hold it, the more you can come across a large and long bear market. Let’s examine the same charts, but for a 5-year holding period (with annual returns).
Using a 5 year waiting period creates a very bad picture for TQQQ. In fact, before the long post-2009 secular bull market, it was rare for TQQQ to even have positive annual returns, let alone outperform QQQ. In contrast, QQQ investors only lost money over a 5-year period if they bought at the peak of the tech bubble or just 5 years before the 2008 crash.
During the secular bull market between the two great crashes of the 2000s, when 1-year TQQQ forward returns were generally higher, 5-year forward returns did not fare well. Few exceptions are when the investor started in 2002-2003 because the 5 period ended before the crash of 2008. However, the 5 year period included the crash of the financial crisis that made all the benefits and more to be deleted. An investment with a 5-year holding period completely eclipses the highest return in 1999 during the tech bubble, making it the worst annual loss in twenty years.
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Conversely, post-2009 continues to favor TQQQ due to the extended bull market. Even if the investor bought exactly 5 years before the COVID crash, TQQQ is still better than QQQ. This is explained by the rapid rise in prices in the COVID crash as opposed to the broader bear markets in the technology and financial bubble crisis.
If we turn to the dividend delta return for a 5-year holding period, the results are surprising. Now TQQQ only breaks 52% of the time, less than a coin flip. Most of these issues stem from the secular bull market that extended after 2009. There is no longer any fat on the positive side of annual excess returns, meaning it is not even very profitable in return. The average over yield is now only 5%. Because of the significant increase in risk for TQQQ, if it takes a currency flip to exceed QQQ, TQQQ is not a good long-term move.
If you had made a QQQ that started in March 1999 and held it until today, you would have six times your original investment despite long bear markets. If you have TQQQ instead, you will need only 27% more than 20 years ago. Most of this is because of the tech bubble that almost completely destroyed your portfolio.
Of course, if you have started investing in a better place, say immediately after the financial crisis, things will be very different. Investors who started in March 2009 and held until today will have an 11x return with QQQ, but a 300x return with TQQQ. However, market timing is very difficult, so it’s best to look at things from a risk-reward perspective.
Proshares Ultrapro Qqq (nasdaq:tqqq), Quotes And News Summary
Dynamic ETFs like TQQQ can be held in the long term, but require very good market timing. Holding TQQQ for too long is almost always guaranteed to hit a big, long bear market that completely wipes out years of previous gains. However, if you can avoid long bear markets like buying anytime from 2009 to today, TQQQ can do a great job on the bottom line.
TQQQ and other leveraged ETFs should only be held by investors with high risk tolerances and good market timing. It is unclear how long this secular bull market will continue and when it will be a tech bubble or another financial crisis that looks like a crash. For many investors, holding the non-deliverable portions of higher-risk ETFs will be better for their portfolios over the long term.
B.A. Economics and mathematics, software engineer @LinkedIn. The old Facebook. I mainly focus on investing in the technology sector where I have local knowledge. I’m a big data geek who does computer aided analysis of stocks.
Analyst Disclosure: I/we have climbed QQQ. I have written this article myself and it expresses my own thoughts. I don’t get paid for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
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I am not a financial advisor. All suggestions here are my own opinion and are aimed at a general audience. Do your due diligence and research your specific financial circumstances before making an investment decision.
Seeking Alpha Exposure: Past results are not a guarantee of future results. No recommendation or advice is given as to whether an investment is suitable for a particular investor. Any views or opinions expressed above may not necessarily reflect those of Alpha Search as a whole. Alpha Search is not a licensed US securities dealer, broker or investment adviser or an investment bank. Analysts are third-party authors that include both professional investors and individual investors who may not be licensed or accredited by any institution or regulatory body.
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