Depends on your age, if you're young, you do want it because your risk tolerance should (in most cases) be much higher than someone who is close to retirement.
Risk tolerance is all well and good and I agree with you there, but you want the risk adjusted rate of return to be favorable, which it isn't for buying and holding geared ETFs[1]. Highlight quote: "It is mathematically impossible to create a fund that makes a continuous offering of its shares and consistently delivers for all its shareholders a stated multiple of a benchmark over time."
No, investing isn't all about optimising for sharpe ratios. For individual investors sometimes you do want a higher CAGR even at a worse risk adjusted return.
Can you explain why you prefer TQQQ over buying LEAPs on QQQ? The spread on the latter seem ok, the leverage factor is under your control, and volatility drag does not reduce your returns (though implied volatility causes fluctuations). I don’t quite understand the market for TQQQ.
Not everyone has the ability to buy options in their 401k.
Most IRAs don't have it without permission.
Timing, take a look at Nov 07, had you bought a leap then, it would have taken until Jan 11 to just break even, you're really pushing the limit of the max option expiry at that point.
All ITM leaps have extrinsic value, even if small. Take this value and divide by the strike price, this is your effective "interest" for not having to spend those dollars to purchase. Depending on your delta, this percentage could be higher than the expense ratio of TQQQ.
In Canada we have a tax free savings account that lets you invest about 6-10k a year entirely tax free (it varies from year to year). The issue is that it does not allow you to leverage your investment or use margin. So to get around that every year I dump my entire 7k into TQQQ and UPRO 50/50 and have done so since 2013.
I don't see why this would be a bad idea and this article seems to be fairly poorly written. In general there is nothing wrong with putting some of your capital in a tax advantaged account into a leveraged ETF. No one is suggesting to dump all your savings into it, but putting some ratio of your earnings into a leveraged ETF allows you to indirectly maximize your contributions.
I'd definitely prefer to use margin directly through my broker, it would be cheaper and less risky than an ETF, but the law is not setup to allow me to do so in the various retirement or tax advantaged accounts, so instead I use this as an alternative.
For ordinary investment I think using some leverage is smart, especially if you're younger. Take something along the lines of 2-2.5x leverage until you're in your 40s, then start scaling it back as you get closer to retirement age.
Leveraged ETFs, which aim to deliver leveraged intraday returns, don't mirror a leveraged position over the long term [1]. In particular, the more volatile the market, the worse the leveraged ETF's returns will be.
Of course not, hence why I said I would in principle prefer to use leverage directly. But as the laws do not permit me to do so in tax advantaged accounts, leveraged funds are the next best thing. But I certainly would not use a leveraged ETF outside of such an account, it's both cheaper and less risky to use leverage directly from your broker.
Do you know if U.S. retirement accounts allow the use of leverage? I am aware of Roth accounts and perhaps some other types of accounts that Americans can use that are tax advantaged. Do they allow margin accounts?
Yes, I'm sure I'm going to lose my shirt because I invest 7k a year into a risky asset.
Certainly there is no other possible way I could have other investments, including other retirement accounts, where I don't use risky assets... nor could it be that the key takeaway from my post is to put SOME of your capital into a risky asset, especially one that is tax advantaged and especially if you're younger.
Of course not, clearly the takeaway from my post is to lose your shirt by taking all your money and investing it into TQQQ.
Yes, the term "lose one's shirt" just means losing some portion of the money you invested. It most definitely does not mean what Oxford defines as "losing all of one's possessions", or what Collin's Dictionary defines as "to lose all that one has" (https://www.collinsdictionary.com/dictionary/english/lose-on...), or what Investopedia explains has its origin from the Great Depression to mean:
"This phrase implies not just loss, but ultimate loss. You may lose something important and precious but if you have lost the shirt off your back then you are not left with much."
Of course from context anyone would see that what you meant by it was just losing some portion of ones investment.
I must definitely have been too insecure to understand your point and thank you not only for clarifying your position, but making such a substantial contribution to this discussion.
You clearly have a deep and nuanced grasp of finance.
> You clearly have a deep and nuanced grasp of finance.
That's the beauty of it, I don't!
Not that I have time to be playing slots with just 7k, but I get to rely on people who do have that deep understanding! That way I (usually) don't have to listen to people who lack said understanding bray about TQQQ!
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That being said it takes minimal common sense and the ability to read a prospectus to steer people away from holding a product designed as hedge for intraday strategies for long periods of time...
So congratulations on your first words that were able to cut through the viscous layer of "angsty 13 year old after being told to go to their room" coating everything you say :)
Retirement accounts, for people making good salaries, are the ideal place for risky investments, because they’re tax-advantaged and a small proportion of your savings.
I've never had a financial advisor or any money manager of any sort sink to the level of "hold TQQQ long term" for an investment account. Usually it's "risky" choices from a selection of "normal" funds.
And exactly it's a relatively small amount anyways... so why waste it on the fees TQQQ is bleeding?
This is a huge deal. If you actually want a leveraged position on the Qs over the long term you either need to pay margin interest or deal with the overhead of rolling a properly structured call option trade. There is no free lunch to be had here. Buying at open and selling at close just isn't an effective strategy for retail traders.
No you do want it, but not to buy and hold for months at a time, you should buy and hold for a few days and then get out after it peaks. You also want SOXL, FAS, UPRO/SPXL, URTY/UWM and TMF and want to operate on these the same way. The key is to know when to buy and sell these. The easiest is to use Price Headley's acceleration or Bollinger bands. Buy when the price falls out of the band, wait for a green candle on the daily and go in big, the next day might be red but you will be positive after a day or two. Sell when it hits the top of the band and there's a red candle.
I've been doing it just fine since 2004. Risk management is a large part too, you have to know when to cut your losses, how much to put in, when to average down, etc.
actually the opposite is true, I do want to advertise it so that "savy" traders follow a predictable pattern making the market move in the same predictable way. People who just buy and hold will continue to provide a floor. What I basically described is a way to buy low and sell high since the majority of technical indicators are based off of moving averages.
That’s awesome, I didn’t know it was so easy to make money, you must be the first to find out about this secret algorithm and the fastest person to execute it
Indeed, I really don't understand why people buy and hold unless their retirement plan forces them to. I've been using this same algorithm since 2004, how about you?
I've been doing stock without ta and got 100% / year.
While I only started in 2017 ( and crypto got me 3 years worth of doubling in 6 months). I wouldn't change my strategy for 1/3rd and watching daily.
I also get out when I think it's the wrong moment. Eg. I only vested 30% now ( at least until end of December). And no, i don't do crypto anymore, got out at 18 k around end of 2017.
buying and holding TQQQ requires some intestinal fortitude I don't have, I'd rather take a few days worth of an upswing and be happy with that. Trading is all about risk management
a red candle on a daily chart, usually at the top of the accleration band but can be in the middle, bottom, etc indicating that there's more selling than buying volume during the day and that the current price has gone below the opening price, by end of day that it closed lower than the open. Knowing how to read various types of candlesticks is also key as they indicate whether bulls or bears are in control.
Depends on how big the green candle (also what kind of green candle it is, e.g. shooting star, hammer, etc?) is and how far above the acceleration band it has gone. For example if there's a red candle on the previous day and you're at or slightly above the top of the acceleration band, but the next day there's a green candle that exceeds the previous (red candle) day's high, then there's a good probability that the price will continue to go up the next day. For example this just happened with Micron stock (MU) on 11/11 and I bought in that day for a nice gain on 11/12.
You also want to look at how far above the long term moving averages you are. I use fibonacci moving averages, e.g. 2, 3, 5, 8, 13, etc all the way up to 2584. One of the key MAs is the 233 day, if you inspect lots of charts you'll see bullish stocks pull back from their all time highs to the 21, 55, and 89, and 233 day MAs, and bounce off those to either continue higher or at least to go up for a while until you see a slow down in the acceleration of the price or a red candle in the middle or top of the accleration band (in which case you should sell).
I use other indicators too on tradingview.com, Ichimoku cloud, wavetrend by lazy bear, chris moody's stochastic mtf, autofib.
I've been considering something similar but routinely pulling the gains into something more stable like TLT/TIP/NUSI and rebalancing within certain limits.
The true risk of leveraged ETF's like TQQQ is not so much the risk of large losses in a downturn, but rather that under extreme market conditions the fundamental mechanism that powers the ETF will break down in some unexpected way.
These leveraged funds are made up of complex derivatives, if the funds counterparties (UBS, Goldman, Societe Generale etc.) are unable to make good on their existing trades with proshares, or refuses to allow proshares to open new derivative positions it spells trouble for TQQQ and other leveraged ETF's.
In a 2008 style scenario funds like TQQQ would be hit particularly hard by 1. leveraged exposure to crashing markets and 2. bankrupt counterparties going bad on TQQQ's swaps.
This. I'm so tired of so many comments on Reddit that go something like "Exchange circuit breakers stop trading if a major index drops 15%, this would be 45% with 3x leverage meaning it's impossible for the ETF to hit zero." This is false for the reasons you mention above and has happened to leveraged ETFs in the past. No one seems to care though.
I respect your position and certainly there is risk, but the intraday risk is not significantly greater than leveraging the index itself. For one, no complex derivatives are being used, you can see the exact summary of every asset held by the ETF here:
They consist of the securities themselves, futures contracts, treasury bills, and index swaps. None of these are considered remotely complex or out of the ordinary and the only security that has any real counterparty risk are the index swaps.
So yes, if Goldman Sachs, or JP Morgan, or one of the other nine institutions listed in the above linked document fail in such a way that no other institution bails them out, then TQQQ's price will fall greater than 3x index it's tracking.
I won't argue those institutions can not fail, but that's the case when you invest, you assume the risk that what you invest in will fail.
The greatest risk of investing in TQQQ is not the counterparty risk or that the fundamental mechanism behind index swaps will break down, that's a risk but it's much less likely than the elephant in the room... being leveraged in an investment during a stock market crash.
You say the swaps are the only component that has meaningful counterparty risk, it is worth noting that the swaps dwarf the other TQQQ holdings over 7:1.
But that's not true and wouldn't even make sense. I literally link to the CSV file detailing every single holding they have down to the dollar. You can open it up in Excel/Google Sheets and immediately tally up the values.
The swaps add up to 39325783771 and the other holdings add up to 25311807166. Even if you add in the futures contracts (NQZ1) you're still only at approximately 2:1 which is within the ballpark of what one would expect from a triple leveraged instrument.
I'm not sure how you got 7:1 but given that all of the numbers are right there, you are welcome to provide your calculations.
I’m 39. My Roth IRA recently passed $1M mostly because of a buy and hold tqqq strategy beginning in 2014. The only time I sold was in Feb 2020 just before COVID and rebought in May of 2020 for the wild ride up.
High risk. High reward. I’m normally a very down the fairway Full market etf investor. But with the Roth i wanted to take a bit of a gamble. And it’s paid off.
That said, the possibility of an XIV moment is very real. Not for the faint of heart by any means.
You cannot borrow money an IRA. I wonder if that justifies the use of a 2-beta S&P 500 ETF such as SPUU in an IRA for the most aggressive investors. The S&P 500 is more diversified than the Nasdaq 100 and should have higher risk-adjusted returns in the long run.
Tqqq is a derivative of the the Nasdaq-100 Index. The danger of Tqqq is that it will fall towards 0 if the index starts to move sideways for a long time or it falls for a considerable amount of time. If the market dives for a short period and recovers then it will recover along with the rest of the market. Percentage wise it will fall deeper than the index but compounding will eventually bring it back to profitability.
It's not for the faint of heart since even in a relatively small downturn it falls hard. During the last index downturn there was a day in which tqqq fell over 9% and kept on going down but now it's recovered and it hit a new 52 week high.
The fund is a high risk high reward investment. I would not avoid it but I would invest the high risk portion of your investment funds and hold it until retirement. It should be small enough so that it does not impact your finances if it suddenly goes to 0. I don't think you should avoid it but you need to be very careful on how much money you invest in it since you can lose it all.
66 comments
[ 2.4 ms ] story [ 121 ms ] threadIn only go up or only go down situations it performs well.
[1] https://www.proshares.com/faqs/geared_investing_faqs.html
Most IRAs don't have it without permission.
Timing, take a look at Nov 07, had you bought a leap then, it would have taken until Jan 11 to just break even, you're really pushing the limit of the max option expiry at that point.
All ITM leaps have extrinsic value, even if small. Take this value and divide by the strike price, this is your effective "interest" for not having to spend those dollars to purchase. Depending on your delta, this percentage could be higher than the expense ratio of TQQQ.
Or just buy leaps on TQQQ then :)
I don't see why this would be a bad idea and this article seems to be fairly poorly written. In general there is nothing wrong with putting some of your capital in a tax advantaged account into a leveraged ETF. No one is suggesting to dump all your savings into it, but putting some ratio of your earnings into a leveraged ETF allows you to indirectly maximize your contributions.
I'd definitely prefer to use margin directly through my broker, it would be cheaper and less risky than an ETF, but the law is not setup to allow me to do so in the various retirement or tax advantaged accounts, so instead I use this as an alternative.
For ordinary investment I think using some leverage is smart, especially if you're younger. Take something along the lines of 2-2.5x leverage until you're in your 40s, then start scaling it back as you get closer to retirement age.
[1] https://www.montereyherald.com/2021/06/30/steven-merrell-fin...
Do you know if U.S. retirement accounts allow the use of leverage? I am aware of Roth accounts and perhaps some other types of accounts that Americans can use that are tax advantaged. Do they allow margin accounts?
Certainly there is no other possible way I could have other investments, including other retirement accounts, where I don't use risky assets... nor could it be that the key takeaway from my post is to put SOME of your capital into a risky asset, especially one that is tax advantaged and especially if you're younger.
Of course not, clearly the takeaway from my post is to lose your shirt by taking all your money and investing it into TQQQ.
Common sense would tell anyone who read my comment "shirt = investment in scheme" not "shirt = every investment you ever made in every form ever"
It's almost like you're insecure about how harebrained your scheme sounds.
"This phrase implies not just loss, but ultimate loss. You may lose something important and precious but if you have lost the shirt off your back then you are not left with much."
Of course from context anyone would see that what you meant by it was just losing some portion of ones investment.
I must definitely have been too insecure to understand your point and thank you not only for clarifying your position, but making such a substantial contribution to this discussion.
You clearly have a deep and nuanced grasp of finance.
That's the beauty of it, I don't!
Not that I have time to be playing slots with just 7k, but I get to rely on people who do have that deep understanding! That way I (usually) don't have to listen to people who lack said understanding bray about TQQQ!
-
That being said it takes minimal common sense and the ability to read a prospectus to steer people away from holding a product designed as hedge for intraday strategies for long periods of time...
So congratulations on your first words that were able to cut through the viscous layer of "angsty 13 year old after being told to go to their room" coating everything you say :)
And exactly it's a relatively small amount anyways... so why waste it on the fees TQQQ is bleeding?
But I’ll add (an hour later) that I think there are better, riskier options.
The second says, "That can't really be a $20 bill lying there, because if it were, someone would have picked it up already."
While I only started in 2017 ( and crypto got me 3 years worth of doubling in 6 months). I wouldn't change my strategy for 1/3rd and watching daily.
I also get out when I think it's the wrong moment. Eg. I only vested 30% now ( at least until end of December). And no, i don't do crypto anymore, got out at 18 k around end of 2017.
anything for other combinations, say, green at top of acceleration?
You also want to look at how far above the long term moving averages you are. I use fibonacci moving averages, e.g. 2, 3, 5, 8, 13, etc all the way up to 2584. One of the key MAs is the 233 day, if you inspect lots of charts you'll see bullish stocks pull back from their all time highs to the 21, 55, and 89, and 233 day MAs, and bounce off those to either continue higher or at least to go up for a while until you see a slow down in the acceleration of the price or a red candle in the middle or top of the accleration band (in which case you should sell).
I use other indicators too on tradingview.com, Ichimoku cloud, wavetrend by lazy bear, chris moody's stochastic mtf, autofib.
These leveraged funds are made up of complex derivatives, if the funds counterparties (UBS, Goldman, Societe Generale etc.) are unable to make good on their existing trades with proshares, or refuses to allow proshares to open new derivative positions it spells trouble for TQQQ and other leveraged ETF's.
In a 2008 style scenario funds like TQQQ would be hit particularly hard by 1. leveraged exposure to crashing markets and 2. bankrupt counterparties going bad on TQQQ's swaps.
See https://www.proshares.com/media/prospectus/tqqq_summary_pros...
https://accounts.profunds.com/etfdata/ByFund/TQQQ-psdlyhld.c...
They consist of the securities themselves, futures contracts, treasury bills, and index swaps. None of these are considered remotely complex or out of the ordinary and the only security that has any real counterparty risk are the index swaps.
So yes, if Goldman Sachs, or JP Morgan, or one of the other nine institutions listed in the above linked document fail in such a way that no other institution bails them out, then TQQQ's price will fall greater than 3x index it's tracking.
I won't argue those institutions can not fail, but that's the case when you invest, you assume the risk that what you invest in will fail.
The greatest risk of investing in TQQQ is not the counterparty risk or that the fundamental mechanism behind index swaps will break down, that's a risk but it's much less likely than the elephant in the room... being leveraged in an investment during a stock market crash.
The swaps add up to 39325783771 and the other holdings add up to 25311807166. Even if you add in the futures contracts (NQZ1) you're still only at approximately 2:1 which is within the ballpark of what one would expect from a triple leveraged instrument.
I'm not sure how you got 7:1 but given that all of the numbers are right there, you are welcome to provide your calculations.
High risk. High reward. I’m normally a very down the fairway Full market etf investor. But with the Roth i wanted to take a bit of a gamble. And it’s paid off.
That said, the possibility of an XIV moment is very real. Not for the faint of heart by any means.
Yes, I get TQQQ has significant risks, including the risk of going to zero. So what? It's not my only holding. It's a modest allocation.
It's not for the faint of heart since even in a relatively small downturn it falls hard. During the last index downturn there was a day in which tqqq fell over 9% and kept on going down but now it's recovered and it hit a new 52 week high.
The fund is a high risk high reward investment. I would not avoid it but I would invest the high risk portion of your investment funds and hold it until retirement. It should be small enough so that it does not impact your finances if it suddenly goes to 0. I don't think you should avoid it but you need to be very careful on how much money you invest in it since you can lose it all.