Why on EARTH doesn't the SQQQ outperform (on the negative side) more than 3x the QQQ?

[zghorner]

Like anything else, they're a tool. Whatever you are doing to lose money with them, try doing the opposite.

 

[SoyUnGanador]

Example:
Stock price = 100
3X price = 100
-3X price = 100

Day #1:
Stock rises 10% to 110.
3X price rises 30% to 130.
-3X price drops 30% to 70.

Day #2:
Stock drops 10% to 99.
3X price drops 30% to 91.
-3X price rises 30% to 91.

Day #3:
Stock rises 1% to 100.
3X rises 3% to 93.73.
-3X drops 3% to 88.27.

After 3 days, the stock is back to the start (100) so 0.00%.
3X ETF lost 6.27%.
-3X ETF lost 11.73%.

So it's the math that causes both to lose rather than 1 gaining the same amount the opposite lost. It doesn't matter what happens behind the scenes as far as the futures/derivatives they're using to back the trades. If there's anything to be gained with the backing, the market provider is keeping those gains.

***Several years ago I shorted a basket of offsetting pairs (NUGT/DUST ... TNA/TZA ... etc..) as I knew if you held both short long enough, they'll both lose or 1 will lose more than the other gains. I made a little but stopped doing it as you never knew when a $10K short might turn into a $100K short.

Thank you so much everyone! And I follow that BKR88! So, let me ask you this. Is the fact that those leveraged funds experience the effect you are describing not evidence that the applicable markets (in the case of SQQQ, the QQQs) tend to be "revisionary" rather than "trend following"? Not the right lingo obviously, but I think you can see what I mean. I say this because, I think using that same type analysis, if you have the QQQs go up in 2 or more periods in a row, the SQQQs will actually do BETTER than 3x as good as the QQQs. I mean, is this something we can learn to help us make more money in the market generally, by tending to fade things?

I always thought the futures tended to drag down performance because there is no free lunch - you have to PAY for that leverage. But putting these funds aside, and asking a different question, can you essentially get free leverage lunch by buying QQQ futures for example rather than QQQs? That would seem like free lunch - if that is the case you can buy QQQ futures (or if those don't exist, Naz futures) using much less than 100% of the money you'd otherwise spend buying the QQQs (like 33.33% of it), and the difference you could put in an income producing security, and thus get ~100% of the upside on the QQQs plus the extra income on the income producing security, with would be significant if you have 66.66% of your account in it.

Thanks again everyone!

 

[BKR88]

can you essentially get free leverage lunch by buying QQQ futures for example rather than QQQs?

Comparison:
NQ Futures contract:
Margin requirement for 1 contract = $15,800 (Amp Global)
5% increase in value = 12,662 (current price) x .05 = 633 x $20 (value per pt.) = $12,660 profit

QQQ Shares:
$15,800 in shares (same $ invested as 1 NQ futures)
5% increase in value = $15,800 x .05 = $790 profit

Obviously the futures gives you much more leverage than QQQ (which can be purchased on margin at x2) so if you want to "invest" in the nasdaq your best bang-for-the-buck is with NQ futures (or options) but looking at the example above, if the market drops 5% you'll be required to add more funds as your initial margin requirement is almost gone with the 5% drawdown.

As for trying to game the leveraged ETFs for a profit, I did some review of it years ago with the leveraged ETF options but didn't come up with anything solid but wouldn't be surprised if the options gurus here could find something.

 

[SimpleMeLike]

We all know the TQQQ is designed as a 3x long fund. We all know that it experiences "drag" or "time decay", or whatever you guys want to call it, so over time it does not truly perform as good as 3x the QQQ. I've tested this, it is true. It makes LESS than 3x the return of the QQQ but as more than 3x the drawdown. Not but a ton, but by a significant amount. Makes sense.

But then, by that logic, shouldn't the SQQQs, which are designed to be 3x negatives, if you shorted perform better than 3x the QQQs, not from a 3x total return perspective, but from a return/draw down ratio? Obviously they could adjust the amount of futures to make it 3x, but are not they just SELLING the same futures TQQQ is buying, and if so, should it not get the benefit, rather than the detriment of that time decay?

But by my calculations - since SQQQs inception, if you had invested $100 in QQQ, you would have received an IRR of 16.945% and a max DD of 35.119%

To make that same 16.695% on your money in the SQQQs, you would have had to shorted $33.367 of SQQQ (note, that is slightly MORE than 33.33% if it was a perfect 3x, showing no time decay working in your favor, the opposite it seems to a very little bit), and your max DD would have been 35.663% (again, slightly WORSE) than the DD on the QQQs.

Why does shorting the SQQQs perform slightly worse, rather than somewhat better, than buying the QQQs? Why is there apparently no time decay or whatever?

Thanks! And sorry if this is a very newb question, I'm not sure I know how these funds work.

Hello SoyUnGanador,

Why not just dollar cost average TQQQ for the next 20 years and make a million dollars?