Pros Have Spoke – Their Top Leveraged Equity ETF

19,406%.

That’s how much you would have gained if you bought the ProShares UltraPro QQQ leveraged ETF TQQQ when it debuted in 2010 and sold at its height in 2021.

Even if you had sold it at the end of 2019, you’d still have gained an astounding +4,500%.

Is it any wonder that financial pros flock to this leveraged ETF at a rate 4x higher than the next closest leveraged equity ETF?

We know that leveraged ETFs can be a double-edged sword.

Pick the wrong one, and you’ll go upside down even when the underlying index is positive.

So, is TQQQ one to consider right now?

Here’s what we think…

Key Facts About TQQQ

• Net assets: $19.5 billion
• 12-month trailing yield: 1.29%
• Inception: Feb. 9, 2010
• Expense ratio: 0.88%
• Number of holdings: 127

The TQQQ tracks twice the daily movement of the Nasdaq 100 index.

That means if the Nasdaq 100 gains 1% on the day, the ETF should increase by 2%.

You get the same thing if it falls.

The Nasdaq 100 is a tech-heavy market-cap-weighted index with heavy hitters like Apple, Microsoft, Amazon, NVIDIA, and more.

Source: ProShares

Like most leveraged ETFs, the TQQQ uses a combination of stock holdings and derivatives to provide the necessary exposure.

So, don’t be surprised if the number of holdings listed doesn’t match what you’d expect.

If you want to understand the equity profile of the ETF, it’s best to look at the underlying index, in this case, the Nasdaq 100.

Source: ProShares

Since tech companies are the largest in the world, almost half the portfolio is weighted towards information technology.

In fact, the top 10 holdings make up over 45% of the total index weight.

Performance

Technology stocks have done exceptionally well over the last 10-15 years.

That’s allowed the TQQQ to deliver incredible returns, well in excess of the market.

Source: ProShares

However, it’s worth noting that leveraged ETFs can lose value from the heavy expense ratio as well as the way it resets each day.

For example. Say the index is valued at $100. It gains 10%. The index would be worth $110. The TQQQ would be worth $120.

The following day, the index drops back down to $100, or a 9.1% decrease.

The TQQQ would drop 18.2% down to $98.18.

So, the Nasdaq 100 is flat, but the TQQQ would be down overall.

This erosion makes leveraged ETFs problematic and why most don’t work over time as you’ll see below.

Competition

We pulled together some of the other top leveraged equity ETFs so you could see how they all performed over time.

• Direxion Daily Small Cap Bull 3X Shares (TNA): Provides 3x exposure to the daily movement of the Russell 2000 small cap index.
• Direxion Daily S&P Biotech Bull 3x Shares (LABU): Provides 3x exposure to the daily movement of the S&P biotech index.
• Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL): Provides 3x exposure to the daily movement of the NYSE Semiconductor Index.
• Direxion Daily Regional Banks Bull 3X Shares (DPST): Provides 3x exposure to the daily movement of the S&P Regional Banks Select Industry Index.

It’s fascinating to see the sheer outperformance of the technology ETFs compared to the rest.

To give you a point of reference, here is the 5-year total return for the underlying indexes:

• Nasdaq 100:+146.6
• Russell 2000:+28.6%
• S&P Biotech:+7.3
• NYSE Semiconductor:+291.5
• S&P Regional Bank: -7.7%

The gap between the leveraged and regular ETFs for the Nasdaq 100 and the Semiconductor index is even more unusual.

The excess volatility in the semiconductor index eroded the value of the leveraged ETF so it’s only ~100% better than the unleveraged compared to the +200% gap between the TQQQ and the Nasdaq 100.

Our Opinion 7/10 

Unlike most leveraged ETFs, we do like the TQQQ.

However, that relies on the continued growth of the tech sector. That changes and all bets are off.

We wouldn’t be buyers up here with market up so much.

But on significant pullbacks, it may be worth adding a small portion to your portfolio.