TQQQ: Any Trend Is Your Friend

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Fasai Budkaew/iStock via Getty ImagesMomentum makes the world go 'round. For leveraged ETFs, that momentum / trend means everything. And for tech stocks, just maybe (*no guarantee here) it could make ...

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And for tech stocks, just maybe (*no guarantee here) it could make ...</p>\n\n<a href=\"https://seekingalpha.com/article/4708276-tqqq-etf-any-trend-your-friend-oscillation-enemy\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>TQQQ: Any Trend Is Your Friend</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nTQQQ: Any Trend Is Your Friend\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-31 21:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4708276-tqqq-etf-any-trend-your-friend-oscillation-enemy><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Fasai Budkaew/iStock via Getty ImagesMomentum makes the world go 'round. For leveraged ETFs, that momentum / trend means everything. And for tech stocks, just maybe (*no guarantee here) it could make ...</p>\n\n<a href=\"https://seekingalpha.com/article/4708276-tqqq-etf-any-trend-your-friend-oscillation-enemy\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4581","symbol_name":"高盛持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4708276-tqqq-etf-any-trend-your-friend-oscillation-enemy","article_id":"2455135181","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2455135181","pubTimestamp":1722430800,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Fasai Budkaew/iStock via Getty ImagesMomentum makes the world go 'round. For leveraged ETFs, that momentum / trend means everything. And for tech stocks, just maybe  it could make leveraged ETFs more viable. Mathematically, it's been well illustrated how most leveraged securities, in most scenarios, over long periods of time should have an expected terminal value of $0. That's pretty bad news for long-term investors of leveraged ETFs, and even the U.S. Securities and Exchange Commission has issued warnings such as this one from 2021 that holding such securities \"for longer than one day\" opens investors up to risks. This same SEC memo went on to warn that the Commission had issued charges against some financial professionals for recommending retail clients hold ETP's  that were designed only for very short-term trading strategies. 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For leveraged ETFs, that momentum / trend means everything. And for tech stocks, just maybe (*no guarantee here) it could make leveraged ETFs more viable. Mathematically, it's been well illustrated how most leveraged securities, in most scenarios, over long periods of time should have an expected terminal value of $0. That's pretty bad news for long-term investors of leveraged ETFs, and even the U.S. Securities and Exchange Commission has issued warnings such as this one from 2021 that holding such securities \"for longer than one day\" opens investors up to risks. This same SEC memo went on to warn that the Commission had issued charges against some financial professionals for recommending retail clients hold ETP's (=Exchange-Traded Products like ETFs and ETNs) that were designed only for very short-term trading strategies. While the rules of mathematics have not changed since 2021, one can't help but to notice a certain degree of thawing at the SEC about leveraged ETFs in recent years. Consider this updated SEC bulletin from August 2023 where the warnings seem less dire, less alarming, and replaced instead with some examples where leverage certainly didn't happen to work out well for investors. So what's going on here? This article will examine the basic risks of leveraged ETFs, some historical performance lessons, situations where leveraged securities may be more viable. I'll finish with reviewing the latest stock market correction and investigate what it may mean for the largest of all leveraged ETFs: The ProShares UltraPro QQQ (NASDAQ:TQQQ). The Mathematic Fundamentals Leveraged ETFs, or at least the ones I'm familiar with, all aim to provide DAILY leveraged returns of a certain underlying benchmark. For TQQQ that means a targeted daily return of 3x the Nasdaq 100 Index (NDX), of which the Invesco QQQ Trust ETF (QQQ) serves as the tradeable proxy. So if the Nasdaq 100 gains +0.8% today, the TQQQ should rise by ~+2.4%. If the Nasdaq 100 fell -0.5% today, the TQQQ should drop by about -1.5%. Simple enough. What novices may not realize is that these leveraged ETFs hold derivatives, and that these derivative positions are reset daily in order to maintain the desired exposure. This causes long-term deviations from the stated 2x, 3x (or even 4x) leveraged return objective. Consider the following 3 examples: Example 1: Underlying index rises 1.00% on day 1, and drops to its original value on day 2 (return of -0.9901% day 2). Let's assume a 10 day period where every second day the index rises 1% and every second day the index falls by 0.9901%. The underlying index begins with $100 base value, and so does a hypothetical 3x leveraged ETF. authorAs you can see here, in this scenario, every time the underlying index reverts to its beginning value, the leveraged ETF suffers more and more price erosion (= beta slippage). At the end of 10 days, the underlying index value hasn't changed, but the leveraged ETF has fallen 0.3%. Example 2: In this 2nd example, instead of alternating up and down days, let's assume the underlying index rises by +1% for days 1, 2, 3 & 4, falls by -1% on Day 5, rises again +1% on days 6, 7, & 8, and falls -1% on day 9 and 10. authorIn this scenario, where markets are trending upwards, the 3x leveraged ETF has delivered better than its 3x daily objective. It has delivered about 3.04x the total 10-day return of the underlying index. Example 3: Let's now consider a downward trend. In this 3rd example, let's assume the underlying index falls by -1% for days 1, 2, 3 & 4, rises by +1% on Day 5, falls again -1% on days 6, 7, & 8, and rises +1% on day 9 and 10. Essentially the complete inverse of Example #2. authorHere, in the downward-trending example, a -11.71% return for the leveraged ETF looks terrible, but in fact nonetheless the 3x leveraged ETF has delivered better than its 3x daily objective. Thrice the -3.97% return of the underlying would equate to -11.91%, yet the 3x leveraged ETF has dropped less than that. (note: the examples above exclude the impact of ETF management expenses) Which all brings me back to my title = \"TQQQ: Any Trend Is Your Friend\". As long as the underlying is trending strongly in one direction, regardless of direction, the leveraged ETF could outperform its base daily multiple. And the Jekyll to this Mr. Hyde = \"Any Oscillation Is Your Enemy\". Not just for TQQQ, but any leveraged security that resets on a daily basis will suffer more beta slippage when price action is oscillating, and do better when price action is trending. TQQQ and SOXL real return examples As various investors have pointed out, leveraged ETFs like TQQQ and the Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL) have outperformed their base 3x multiple over long periods of time. Data by YChartsData by YChartsI wouldn't be surprised if these outsized long-horizon leveraged ETF returns had something to do with SEC seemingly tempering its warnings in recent years. (CAUTION: This is not license for investors to underestimate the risks of leveraged ETFs!!) I myself posted a suggestion in mid-June for holders of SOXL to cash in on their fortunes and keep their semiconductor exposure via the unleveraged iShares Semicoductor ETF (SOXX). That appears to have been a timely call, as the SOXL has dropped a whopping -36% since the day of that article, while the unleveraged SOXX is down ~11.7%. Turns out that was an incredibly timely call to move out of leveraged SOXL, but I can't really take full credit, as my thesis was primarily predicting volatility/oscillation as opposed to an outright correction in semiconductor stocks:  I'm not suggesting that semiconductor names won't move higher from here, but those who are long the Direxion Daily Semiconductor Bull 3X Shares ETF should take stock of the trend they're depending on. -Source: My own words, June 18th  The Outlook for TQQQ and Leveraged ETFs Stock market corrections are generally understood to be healthy. And for leveraged ETFs, the best type of correction is one that trends firmly downward, as opposed to oscillating between declines and rebound days. And what we've seen in tech stocks over the past few weeks is precisely a strong downward trend. Seeking AlphaDare I say it, but if you're an investor in TQQQ, or are considering an investment in TQQQ, despite the heavy losses recently, this is what you want to see. Leveraged ETFs perform best (better than they otherwise would) when they're linked to an underlying index that has an inclination to trend strongly in one direction or the other. Will I ever recommend leveraged equity ETFs? - no, never. The risks are too great for my appetite, as investors in these are depending not just on strong performance from the companies underlying the index/ETF, but also the pattern of returns. In my view, that's just unnecessary guesswork. But, if I had to, I'd rather own a leveraged ETF in security types that tend to trend, as opposed to those that do not. For example, while stocks are expected to generally rise over time, that's not the case with security types like volatility (VIX), so I'd never go long the iPath S&P 500 Short Term Futures ETN (VXX) or the ProShares Ultra VIX Short-Term Futures ETF (UVXY), especially with the contango exposure they face.  I feel much the same about currencies (DXY) which will tend to revert to their means. Yes, the USD has been trending strong in recent years, but currency rates are relational, and so there's nothing I find appealing about something like the Invesco Double Beta US Dollar Index Bull (UUP). But for an asset type that is expected to rise over time, and is known to trend strongly, such as tech stocks, owning a leveraged ETF on these may be much more forgivable. Conclusion I would never personally invest in leveraged ETFs, unless I was taking a short speculative bet. The risk of value erosion (beta slippage) is more than I'm willing to take on with longer-term holdings.  However, the recent market pullback has proven once again that technology stocks often move in strong trends; they tend to commit to a direction for periods of time. That's the perfect scenario for anyone invested in securities like TQQQ. Despite the ~8% drubbing the Nasdaq-100 has taken after reaching all-time highs during the 2nd week of July, in many ways this is what holders of TQQQ, SOXL, and similarly leveraged tech ETFs should want to see. Had that ~8% tech stock decline occurred over a period of several months as opposed to several weeks, TQQQ investors would be worse off. So the underworkings of this recent selloff has been beneficial for investors in TQQQ and similar leveraged securities. Risks to TQQQ  Although a sharp downward trending correction has caused less harm to (long) leveraged ETFs like TQQQ and SOXL than a slow oscillating correction, there's absolutely no guarantee that a period of oscillating markets isn't upcoming. Very sharp daily drawdowns can be highly damaging to the capital of leveraged ETFs. 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