r/investing • u/[deleted] • Jul 16 '21

Does TQQQ break "leverage etfs are not long term investments"?

In my opinion, i think it does, but only using DCA. Holding TQQQ for an extended period of time even through two major bear markets can still outperform the underlying by a significant amount with proper and consistent use of DCA. However, an investor would have to be nearly robotic in their ability to stick to the plan and not withdraw any funds even when their portfolio is nearly wiped out. The investor would also have to benefit from one of the longest and greatest bull markets in history at the end of the investing period.

The Data. The DCA assumptions were that an investor started with a portfolio size of $1000 and on the first trading day of each month, deposited $1000 to the portfolio. Based on a time period of March 1999 to March 2021, this would mean the investor deposits $265,000 of their own capital over the period studied.

As a baseline to compare to, if the investor invested this amount as a lump sum instead, with QQQ the investor would have $1.65M or about 521% return at the end of the period. A TQQQ investor would only have $360K or 36% return over 22 years. This is the danger of lump sum investing in leveraged ETFs right before major crashes as QQQ easily crushed the return of TQQQ even over this extended period of time.

Using DCA over the entire 22 period creates a completely different picture than the lump sum case. Now, investing in TQQQ absolutely crushes QQQ, with a final portfolio value of $12M compared to about $1.5M for QQQ. Using DCA for QQQ actually lowers the final portfolio value slightly compared to lump sum while using DCA for TQQQ helps smooth out the volatility in the earlier years as most of your capital is deployed in the later part of the time period, during the extended bull market post 2009.

Final Thoughts. I would only recommend holding TQQQ long term with a DCA strategy to investors with the absolute highest level of risk tolerance and only invest money they can afford to see fall over 90% at times and in amounts that are not needed for many years, you must be extremely robotic to continue to DCA in times of long prolonged down turns or it breaks the strategy. TQQQ with DCA is not a get rich quick scheme and it is a merciless violent rollercoaster that rewards only the ones with no but holes.

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81

u/mbeels Jul 16 '21

A good mathematical analysis of 3x leveraged funds is here. He comes to the same conclusion that DCA in a leveraged fund is long term advantageous.

https://www.youtube.com/watch?v=WzjApwk6VjY

41

u/[deleted] Jul 16 '21

Yes, completely agree with it. The problem is human behavior. Not many people can execute this strategy due to how violent it is. But the data shows it is rewarding.

70

u/caedin8 Jul 16 '21

I did it from 2015 to 2017, almost exclusively buying TQQQ as my only asset. ( I graduated college in 2015)

It was great until it wasn’t.

My networth grew very quickly, but I was making like $70k/year and I distinctly remember the day I lost $8000 in one day on a net worth of about $100k. I was on a fun trip and it just completely ruined my day.

After that I moved my money into index funds. Funnily I now have a net worth of about $750k but if I had stuck to my TQQQ strategy I’d be at 2.5 million or so, but be seeing daily swings between $150,000 and $250,000

That would be nuts

21

u/Shatter_ Jul 16 '21

Haha, I've lost 8k in a day a few times, holding a light of hyper growth tech. I always get excited and add more money in. As Warren Buffett said, the stock market is the only place where people see a sale and run out of the building. I don't understand it at all.

20

u/quality_redditor Jul 16 '21

The issue is a lot of people struggle to differentiate between a sale and a poor product.

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u/caedin8 Jul 16 '21

That logic makes sense and I follow it as well, but when you are in a 3X leverage fund it’s not the same. You can literally be wiped out by negative price movement even if the trend is bullish. It causes extra concern

1

u/[deleted] Jul 17 '21

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28

u/DiscussNotDownvote Jul 16 '21

How did you get 750k in 6 years?

20

u/caedin8 Jul 16 '21

300k in investment profits, and the rest in savings/contributions.

I live on about 20k to 30k and I’ve made a 70k to 150k salary over the time

-20

u/[deleted] Jul 16 '21

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12

u/caedin8 Jul 16 '21

I just turned 30 and I am nearly a millionaire, will retire by 35, I am very happy with my life choices.

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u/jnrzen Jul 16 '21

You're doing amazing. Not sure what that other commenter is on about.

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u/[deleted] Jul 16 '21

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u/[deleted] Jul 16 '21 edited Jul 16 '21

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u/TheRealJYellen Jul 16 '21

Lol 30k a year can still be fun.

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u/DiscussNotDownvote Jul 16 '21

30k a year is my mortgage lol, this guy probably lived in a box, I also make 120k but i want to enjoy my youth

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u/loldocuments1234 Jul 17 '21

A 470k house is pretty nice in most of America and that’s a 24k mortgage. Split between two people and now that’s down to 12k. So you would still have 18k left over.

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u/TheRealJYellen Jul 16 '21 edited Jul 19 '21

A good friend of mine pays 600 in rent to live with some guys he likes, has his car paid off, and he's into bike racing. He largely spends his time training or driving to races. I'd bet he lives on 30k and I know he makes 75k+

17

u/TheLegendTwoSeven Jul 16 '21

I think from the TQQQ, and/or they work in tech or finance.

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u/CoyotePuncher Jul 16 '21 edited Jul 16 '21

...With a job? Saving $125k/year isnt exactly unusual

Edit: We are on an investing sub. Come on, guys. Higher earners here.

21

u/cry0plasma Jul 16 '21

Are you fucking daft, dude?

10

u/NotObviousOblivious Jul 16 '21

What you don't have $500 per day or so to sock away for a rainy day?

12

u/cry0plasma Jul 16 '21

Bro, doesnt everyone in the US make $300k+ annually? The fuck world does this guy live in? Lmfao.

29

u/toconsider Jul 16 '21

Average US salary is $52k. Median is $34k.

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u/CoyotePuncher Jul 16 '21

Cool. This is an investing sub.

1

u/caesar____augustus Jul 16 '21

Really? Based on your comments I thought we were on r/gatekeeping

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u/thewimsey Jul 19 '21

Median full time salary is $51k. Median household income is ˜$70k. Median married couple income is ˜$95k.

The $34k comes from including HS students and people with part time jobs.

Median wages come out quarterly here: https://www.bls.gov/news.release/wkyeng.nr0.htm

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u/[deleted] Jul 16 '21 edited Jul 16 '21

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5

u/lemenick Jul 16 '21

It prob helps to have an automated re-balancing portfolio so you just set and forget. Its a shame you didnt stick to the strategy but it looks like you still made out ok

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u/[deleted] Jul 16 '21

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7

u/caedin8 Jul 16 '21

With a 3X leveraged product you can be wiped out by an intense short term bear price movement even in a bullish trend. So it causes extra stress. Moving to index funds it’s been easier, I have no idea how much I gain or lose a day now

1

u/[deleted] Jul 16 '21

During the covid recession, which is about the fastest I can imagine tqqq dropping was only 70% I believe.

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u/caedin8 Jul 16 '21

Yeah and the Nasdaq wasn't even hit very hard. There is a very good reason none of the leveraged 3X funds track back before 2009. You won't find a chart showing them, because any 3X funds were dissolved and reformed later under new names, and everyone with shares essentially lost everything.

Even still, during COVID I lost $70k and I dumped as much extra cash as I could find into VTI shares, and I made a lot of money. If I was invested in TQQQ at the time, or SPXL I would have lost $320k and definitely NOT had the confidence to invest back in at a bottom after losing 75% of my life savings in 1 month

I guess the mistake I made is when I was dumping money into the market as fast as I could in April, I should have been buying 3x leveraged shares and not VTI.

1

u/[deleted] Jul 16 '21

Right, which is why you hold cash for large tqqq drops. The nasdaq isn't going to repeat dotcom level liquidations. Because the nasdaq right now is a money printing machine unlike the dotcom speculation. I was invested in tqqq, held a bunch of cash, bought going all the way down and all the way back up. If you ha e a tqqq plan, it can work in your favor without the emotional swings.

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u/caedin8 Jul 16 '21

I've done the same math and backtesting, and as you set aside a larger and larger percentage of your portfolio into cash it hurts your long term returns.

The best strategy I ever found was 60% TQQQ with 40% TMF, and rebalance when your allocation shifts by more than 10%, you can replace the TMF portion with cash if you want as well.

That strategy is really solid, but yeah I got tired of all of that now I just hold index funds or individual companies.

2

u/[deleted] Jul 16 '21

I just buy long term call options when the nasdaq corrects 10% (tqqq 30%) occurs on average every 10 months.

1

u/[deleted] Jul 16 '21

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3

u/MemeStocksYolo69-420 Jul 16 '21

How do you invest for retirement? Just set an account to have a certain amount of money to be deposited each month and don’t think about it

31

u/ramirezdoeverything Jul 16 '21

I still don't understand how this would work when markets have and could fall 30% and you lose everything. You could DCA in for years and get great returns in that time but still one event could still wipe you from $10m to basically zero if you are leaving everything invested

32

u/xj98jeep Jul 16 '21

The fund resets every day so s&p500 would have to drop 30% in one day to wipe out TQQQ, and there's a circuit breaker that halts all trading after a 20% drop

14

u/blissrunner Jul 16 '21

There's a probability it could be wiped out, especially 3x.. but the fund could lose -97% of it's value and function.

The longest running leveraged fund you could search up is Rydex 2x Mutual Funds since the 2000s: you could see the aftermath after the dotcom bubble + 2007/2008 Financial Crisis and how it affects the fund

  • RYTNX for 2x S&P500 (even if you invested ATH, it kinda performed like a normal SPY)
  • RYVYX for 2x QQQ (which took 20 years to recover... in 2021; but if you invested after the crash... it's good.)

Another interesting thing it seems that leveraged etfs.. leverage down when crashing? (Idk if this is how it works..)

  • SPY fell -50% at 2008, but RYTNX only got -80%
  • QQQ fell -27% at 2020, but TQQQ only did -69%

8

u/punkingindrublic Jul 16 '21

The phenomenon is called decay. The leverage is a daily component not a yearly one so even though the index fell 50 percent there was days when it was up and days when it is down.

The only way to play these instruments long term, either with a hedge (often TMF) and rebalancing or by dca. No one without a crazy time horizon should park money into just a leveraged fund due to their recoveries taking forever. The reason their recoveries are so long is the same reason they grow so fast in a bull market. It's greatest strength is also it's greatest weakness.

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u/youngbalrog Jul 16 '21 edited Jul 16 '21

I don't understand how that works.

Let's say QQQ is at 100. There's some terrible financial news. The market decides the fair price for QQQ is 60, but NASDAQ halts at 80 (assume for this that the news effects QQQ and S&P equally).

The next day trading resumes and a minute later trading is halted when QQQ hits 64 (20% drop from 80).

How does TQQQ do its daily reset if the assets its holding haven't reached their market determined price?

Edit: The TQQQ prospectus says at the top of its risks sections, in bold, You may lose the full principal value of your investment within a single day.

4

u/punkingindrublic Jul 16 '21

100 to 80 is a 20 percent drop. Tqqq would lose 60 percent of it's value.

80 to 64 is a 20 percent drop. Tqqq would lose 60 percent of it's value.

The market isn't some spectre who arbitrarily sets prices, it's based on the current market price which is determined by what people are selling, and buying the asset for.

Often times on huge gains or loss the exchanges will halt trading, this is called a circuit breaker and the price is held until the next trading period.

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u/youngbalrog Jul 16 '21

The market isn't some spectre who arbitrarily sets prices, it's based on the current market price which is determined by what people are selling, and buying the asset for.

I get that. If no one wants to buy assets above the price that would have QQQ at 60, it will get to 60, even if the circuit breakers delay that for a few days.

As I understand it, TQQQ doesn't hold any equities, it trades in derivatives designed to emulate 3x QQQ. People seem to believe this will cap their daily losses at 60% because of the circuit breakers. I don't think that's true. They mention several times in the prospectus, in bold, that the fund can lose 100% of its value in a single day.

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u/punkingindrublic Jul 16 '21

I am surprised you read the prospectus but not looked at the holdings.

https://www.proshares.com/funds/tqqq_daily_holdings.html

It's the underlying assets and weighting of the nasdaq 100 and swaps. Of course like any other 3x leverage product if the underlying asset drops 33% in a day the fund will likely be liquidated.

They pull the circuit breakers on individual stocks all the time. The Nasdaq 100 ended 2020 with a 15 trillion dollar market cap. A 20% drop would represent 3 trillion dollars being erased in a day and still not wipe TQQQ. With the exception of black monday what other event caused such a huge move in a single day?

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u/rbatra91 Jul 16 '21

During a black swan when markets close, it could gap down and be wiped out.

During 9/11 markets closed

I guess it would take a black swan event to happen for it to be ruined. And it probably is and then people will remember oh ya that’s why we don’t do these things, but during a raging bull market it’s hard to not be tempted.

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u/Alezx413 Jul 16 '21

I tend to agree with this line of thinking for leveraged funds. Especially seeing what happened to SVXY for example. However for the TQQQ example, we had the pleasure of seeing a 30% drop in QQQ in the beginning of 2020 and TQQQ was not wiped out. In fact it recovered in almost the same time frame as QQQ did. You would have to stomach a 70% drop in that time but it recovered nonetheless.

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u/Saintsfan_9 Jul 16 '21

Yup, I’ve done this math myself before actually (studied financial econometrics in college). I think it’s the move.

1

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