Leveraged ETFs as long-term hold...

[Overnight]

Sorry this thread may be a bit redundant, but I couldn't find the other thread here in which I wanted to ask this question...

I currently have a small chunk of change in Invesco QQQ. Simple standard tech ETF.

Then I learned that there's 3x-ETFs of QQQ, and some recent announcement of a 5x QQQ ETF coming?

My question revolves around the following...

The reason I am in the QQQ to begin with is because I want long-term expose to the tech space, rather than holding a whole basket of individual stocks.

The QQQ will suffer drawdowns of course, but it will never crash to zero.

So would that money not be better served in a 5x-QQQ? What is the true risk of a leverage ETF? Can they go to zero?

 

[BKR88]

Some are worse than others. They'll have a reverse stock split before going to zero so no they won't go to zero.
Leveraged ETFs based upon futures can be ugly.
https://seekingalpha.com/article/4464730-pricing-of-leveraged-etf-decay-a-different-approach

 

[MKTrader]

So would that money not be better served in a 5x-QQQ? What is the true risk of a leverage ETF? Can they go to zero?

In theory, yes. Will they? I don't know. The 3X ETFs I've seen had drawdowns that were less than 3X the indexes during the March 2020 crash...though they were still scary times. They're repriced daily as I understand, so this may also prevent or at least slow down their approach to zero. In addition, if you held them long term, funds like the TQQQ would actually have made like 12 times the value of the QQQ instead of 3X. This guy's YT channel has some interesting info on them.
Jayme - YouTube

That said, I'd be hesitant to hold large amounts of them long-term without some kind of timing, hedging, profit-taking, etc. I know some volatility ETFs have bitten the dust. And 5X leverage sounds crazy unless it's really short term trading and you really have a proven system for trading them.

 

[Overnight]

In theory, yes. Will they? I don't know. The 3X ETFs I've seen had drawdowns that were less than 3X the indexes during the March 2020 crash...though they were still scary times. They're repriced daily as I understand, so this may also prevent or at least slow down their approach to zero. In addition, if you held them long term, funds like the TQQQ would actually have made like 12 times the value of the QQQ instead of 3X. This guy's YT channel has some interesting info on them.
Jayme - YouTube

That said, I'd be hesitant to hold large amounts of them long-term without some kind of timing, hedging, profit-taking, etc. I know some volatility ETFs have bitten the dust. And 5X leverage sounds crazy unless it's really short term trading and you really have a proven system for trading them.

Thanks for the vid, it was quite educational for me.

 

[Axon]

I learned that there's 3x-ETFs of QQQ, and some recent announcement of a 5x QQQ ETF coming?

My question revolves around the following...

The reason I am in the QQQ to begin with is because I want long-term expose to the tech space, rather than holding a whole basket of individual stocks.

The QQQ will suffer drawdowns of course, but it will never crash to zero.

So would that money not be better served in a 5x-QQQ? What is the true risk of a leverage ETF? Can they go to zero?

No matter how bullish I was I wouldn't hold a 5x QQQ long term since the decay from the daily rebalancing will likely be higher than the gains meaning even if the underlying QQQ goes up the leveraged product will likely lose value over periods more than a few weeks. The 3x TQQQ on the other hand is a different story and in the last decade that 3x daily rebalanced leverage has been a good sweet spot juicing the gains while the low overall volatility of the market has helped minimize the decay from rebalancing. Volatility is the bête noire of leveraged ETFs and when volatility gets too high they start losing money really fast. We've had a good run in geared equities but e.g. leveraged commodity based ETFs haven't faired nearly as well. Natural gas is up about 17% since this time 10 years ago, however the 2x /NG leveraged etf BOIL is down over 99% in the same time frame. That's volatility decay (and futures market contango) doing its work.

Another reason I'd stay away from 5x QQQ is should the underlying index drop 20% in a single day you're done. 5x QQQ will be wiped out and your money is gone. Unlikely scenario but not impossible. The Nasdaq would have to drop over 33% in a day for TQQQ to get liquidated. Of course if you look in the respective prospectuses it's probable a smaller drawdown will trigger the "acceleration" event where the ETF provider will close the fund so keep that in mind too.

Considering all that, there's some quality work that's been done showing 2x daily rebalanced leverage is best when averaged out over many market regimes so maybe consider the 2x leveraged QLD instead of TQQQ. Here's a link to some good info: http://ddnum.com/articles/leveragedETFs.php

Disclosure, as for me I've been long thousands of shares of SOXL the 3x leveraged semiconductor ETF since near the bottom in April 2020 so you can imagine how much fun I'm having. It's since gone up 15 times and has undergone a 15 for 1 split. I'm supremely bullish on semiconductors, still holding and plan to for the forseeable future but it's a relatively smaller portion of my portfolio. Not going all in on leveraged ETFs is probably a good idea.

Here's a couple different takes on risk management:
The legendary Hedgefundie thread on bogleheads where a guy basically swing trades 3x leveraged QQQ and 3x leveraged 20+ year treasuries https://www.bogleheads.org/forum/viewtopic.php?t=272007
Also, an idea on when to get in and out based on volatility using the 200 day moving average: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741701

 

[KCalhoun]

contango/decay erodes value of some over time; i usually hold < 2weeks

 

[Overnight]

*rant on* @Magna sorry, cannot help with the language) When I think about these leveraged ETFs, I think along the lines of how the hell to recover in a short amount of time the BULLSHIT high-yield stocks I have like T. This is the worst fucking thing I have ever invested in. And mother fucker, I went into that 20 months ago, right before the pandemic hit, by getting OUT of UnitedHealth! NOW look at UNH! God damned you!!!

What the FUCK is AT&T? Why the FUCK am I in some POS stock that yields some great yield, when same said POS keeps going down down down?!?! FUCK YOU T! Mutha-fucka, I just want to take what is left of that position and put it into a 200x QQQ and roll the dice.

The premium on this fuckface stock is lost anyway. It's a 100% loss in my eyes, because it is the world's worst stock EVER! So might as well put what remains of it into something just as risky as one of the world's oldest corporations which was supposed to grow forever! ROFFLE!

Sorry. *rant off*

I need to breathe.

 

[verial]

Disclosure, as for me I've been long thousands of shares of SOXL the 3x leveraged semiconductor ETF since near the bottom in April 2020 so you can imagine how much fun I'm having. It's since gone up 15 times and has undergone a 15 for 1 split. I'm supremely bullish on semiconductors, still holding and plan to for the forseeable future but it's a relatively smaller portion of my portfolio. Not going all in on leveraged ETFs is probably a good idea.

I wonder how much more you would have made while hedging risk were you to have used options instead of subjecting yourself to the undeniable downward pressure of leveraged ETFs. Even buying calls on individual semi stocks would have been smarter from a risk/reward perspective.

 

[Axon]

I wonder how much more you would have made while hedging risk were you to have used options instead of subjecting yourself to the undeniable downward pressure of leveraged ETFs. Even buying calls on individual semi stocks would have been smarter from a risk/reward perspective.

Worthwhile points but this not being my journal I didn't think it appropriate to give a complete rundown of my entire trading strategy. Suffice it to say I did plenty of option trading around my position and trading of individual semiconductor names in pic related as well as the various unleveraged semi ETFs and others with heavy semiconductor exposure like EWT, the Taiwan specific ETF, along with a side helping of VIX (really VSTOXX, personal preference) futures hedging. Too I may have gotten a little sidetracked adding to a certain Bitcoin position that took a massive shit on March 12-13, 2020 but that's a different trade and post.

Still, the bulk of the gains came from the long SOXL position which is up over 10x in a relentless bull market since the beginning of the trade, not exactly the friendliest environment for profitable hedges (I'll avoid the philosophical turpitude and theory of "profitable hedge" and whether that's even a good thing for now). I'm sure I could have done better but I did manage to uplift an otherwise tangential and unloved 5 figure stock account to 7 figures (remember from above this is a small -but getting larger!- portion of my trading picture) in 19 months while the overall tech index is up 122% so I'll console myself with that. Next time maybe I'll wait for the exact bottom, mortgage my house, sell everything else that isn't nailed down and go all in short term far OTM NVDA calls then keep rolling and rebalancing until the account is a sizable percentage of the entire US stock market but we'll have to see how it goes then. Hypothetically I could have done a whole lot of things but, alas, the SOXL play is what actually happened. I do plan on starting a journal at some point and I look forward to your insights on how I can do better on the trades I post.

 

[murray t turtle]

Sorry this thread may be a bit redundant, but I couldn't find the other thread here in which I wanted to ask this question...

I currently have a small chunk of change in Invesco QQQ. Simple standard tech ETF.

Then I learned that there's 3x-ETFs of QQQ, and some recent announcement of a 5x QQQ ETF coming?

My question revolves around the following...

The reason I am in the QQQ to begin with is because I want long-term expose to the tech space, rather than holding a whole basket of individual stocks.

The QQQ will suffer drawdowns of course, but it will never crash to zero.

So would that money not be better served in a 5x-QQQ? What is the true risk of a leverage ETF? Can they go to zero?

%%
NOT likely they go to zero\most of those managers have planned against that with many things we have never thought of......................................................................[Multi-hundred page annual report] A prolonged sideways trend could chop a 5X to shreds, most likely, but not to zero]
TO answer your question; i've seen QLD [2xQQQ] makes profits better than TQQQ+ i've done both.
Seldom daytrade either.