5 Ways the Pros Play Leveraged ETFs

Sometimes, you just want a little bit extra out of the market.

That’s why investors and traders will often look at leveraged ETFs to juice their bets.

The top search amongst financial pros this year is ProShares UltraPro TQQQ.

This 2x daily leveraged ETF is up almost 25% year-to-date.

But before you start scooping up shares, there’s key info you need to know.

Key Facts About TQQQ

• Net assets: $22.09 billion
• 12-month trailing yield: 1.39%
• Inception: Feb. 9, 2010
• Expense ratio: 0.88%
• Number of holdings: N/A

The TQQQ mirrors the Nasdaq 100’s daily moves at double the rate, amplifying gains and losses alike. 

So, a 1% uptick in the Nasdaq 100 translates to a 2% rise in this ETF, and the reverse holds true for declines. 

Dominated by tech titans such as Apple, Microsoft, Amazon, NVIDIA, among others, the Nasdaq 100 represents a heavyweight lineup in a market-cap-weighted arena.

Source: ProShares

Because of the heavy weighting behind the top 10 companies, the index itself is effectively 50% technology.

Source: ProShares

Performance

The TQQQ is one of the few leveraged indexes that’s held up over the years.

You see, most leveraged indexes lose value over time because of the cost associated with that leverage.

So, if the Nasdaq 100 went nowhere over five years, the TQQQ would still lose value.

However, a super bull market, like the one tech stocks have experienced, can generate incredible returns.

Source: BarChart

Competition

To give you a sense of how the leveraged ETFs work and are used by retail and institutional investors, we pulled the top five leveraged ETFs searched out by financial pros over the past month.

• ProShares UltraPro Short QQQ (SQQQ): The SQQQ is the same thing as the TQQQ, just bearish, tracking 2x the inverse daily percentage movement of the Nasdaq 100.
• Direxion Daily Small Cap Bull 3X Shares (TNA): If you want leveraged exposure to small caps, the TNA gives you 3x the daily percentage movement of the Russell 2000.
• Direxion Daily Semiconductor Bull 3x Shares (SOXL): Maybe you’re looking to bet on the semiconductor sector. If so, the SOXL is the 3x leveraged play on the S&P Semiconductor Index.
• Direxion Daily Small Cap Bear 3X Shares (TZA): The opposite of the TNA, the TZA gives 3x the inverse daily percentage movement of the Russell 2000.

Inverse ETFs do poorly because stocks always rise over long enough periods. That’s why most investors use them as trading hedges rather than long-term holdings.

However, the TNA’s performance illustrates our earlier point about asset value erosion over time, as the Russell 2000 index is up about 35% over the same period.

Our Opinion 8/10 

We’d be cautious about adding any leveraged ETF to your portfolio.

If you do, consider them for the short-term rather than core holdings.

However, based on history, the best place to incorporate them is after large market slides.

Otherwise, they’re best used as trading hedges.

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