Can triple leveraged ETFs go to zero?
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero. Before this happens, leveraged ETFs can undertake a reverse stock split, creating higher-priced shares but reducing the number of ETF units outstanding.
It's triple the exposure to the Nasdaq. A 33% decline in the Nasdaq means losing 100% in TQQQ. Buy a call option on QQQ--same leverage, but limited risk. Think of it as a long-term option, though it could go to zero, too, but it's a smaller loss.
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.
If the volatility is high enough and the holding period is long enough, the constant will be small and the return on the leveraged ETF will be smaller than that of its underlying index. It is possible for an investor in a leveraged ETF to earn negative returns even when the underlying index increases in value.
An ETF follows a particular index and the securities are present at the same weight in it. So, it can be zero when all the securities go to zero.
Re: Investing 100% into TQQQ
Don't hold it long term for anything more than your “play money”, which for those that even allow for “play money” in their IPS is no more than 5%. The biggest risk is a sideways choppy market. You will get killed from the volatility in that environment.
However, because of the structure of leveraged ETFs, the recommended holding period is from intraday to only a few days. Moreover, if the index drops, the TQQQ will lose 3x as much as the QQQ. Therefore, TQQQ may be better suited for day traders or swing traders.
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.
The Bottom Line. 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.
The value of an ETF, including QQQ, is determined by its net asset value (NAV). The NAV is calculated by dividing the total value of the fund's assets by the number of outstanding shares. As long as the underlying assets of QQQ hold value, it is highly unlikely for the ETF to go to zero.
Why triple leveraged ETFs are bad?
The constant rebalancing of leveraged ETFs creates higher costs, which eat into the investors' returns. Experienced investors who are comfortable managing their portfolios may be better off controlling their index exposure and leverage ratio directly, rather than through leveraged ETFs.
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.
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.
Investors can hold the ETF for longer than a day, but returns can vary significantly from 2x exposure over longer periods. That's because the ETF resets its leverage daily. In oscillating markets, the leverage reset can significantly erode returns.
The largest Aggressive ETF is the iShares Core Aggressive Allocation ETF AOA with $1.82B in assets. In the last trailing year, the best-performing Aggressive ETF was AOA at 17.81%. The most recent ETF launched in the Aggressive space was the iShares ESG Aware Aggressive Allocation ETF EAOA on 06/12/20.
One, TQQQ's use of debt and swaps amplifies the potential gains, but also risks and expenses. This is why TQQQ has an expense ratio near 1%, which is quite high for an ETF. As a result, investors are taking on quite a bit of risk but also are paying quite a high fee (relatively) to hold this exposure.
The main risk associated with these options is volatility, which can lead to significant losses if not managed properly. It's crucial for investors to have a solid risk management strategy in place before investing in TQQQ options.
Investors should note that TQQQ's leverage resets on a daily basis, which results in compounding of returns when held for multiple periods.
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.
How does TQQQ make money?
ProShares UltraPro QQQ (TQQQ) is also an ETF that is simply a leveraged version of QQQ by 3X. Meaning that if QQQ is up 1%, TQQQ would theoretically be up 3%, and the same ratio would be applied if QQQ falls 1%. This is accomplished by utilizing derivatives and leveraging to provide the 3X return of QQQ.
For investors seeking an alternative to QQQ's mega-cap exposure, the Invesco S&P 500 Top 50 ETF (XLG) is an excellent option.
For any holding period other than a day, your return may be higher or lower than the Daily Target. These differences may be significant. Smaller index gains/losses and higher index volatility contribute to returns worse than the Daily Target.
The SQQQ is meant to be held intraday and is not a long-term investment, where expenses and decay will quickly eat into returns. It is not appropriate as a long-term holding, even among bearish investors.
TQQQ is nowhere near its all-time high despite the fact that the QQQ is, and that's due to leverage. During sustained bear markets, leveraged funds get absolutely destroyed, so you have to be careful about when you employ these leveraged funds.
