Leveraged exchange-traded funds are designed to short-term instruments, not long-term, buy-and-hold investments. However, there are examples where traders tempt fate with these products.
What Happened: There are also examples of that strategy paying off, though the cautionary tale is that investors shouldn't expect this to be the case with regularity. Take the case of the ProShares UltraPro QQQ (NASDAQ:TQQQ), which is designed to deliver triple the daily returns of the high-flying NASDAQ-100 Index.
How high flying you ask? The NASDAQ-100 is closing in on doubling status since the end of 2018. Over the past 24 months, the tech-laden benchmark is beating the S&P 500 by a margin of roughly 2.5-to-1.
Why It's Important: Past performance isn't a guarantee of future returns, but TQQQ's history is compelling.
“The historical performance data strongly favors the Nasdaq-100 3x (TQQQ) for core equity exposure. The unleveraged Nasdaq-100 (QQQ) appears to be the “next-generation S&P 500” and adding moderate leverage can be priceless at times,” writes David Kreinces of ETF Portfolio Management. “In fact, TQQQ returned 80x your money over the past 10-years, while the S&P 500 delivered just under 3x, or 285% in total return.”
Consider the following about holding TQQQ for the past decade: that move would have generated annualized returns of 55%, beating famous NASDAQ-100 members, such as Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Nvidia (NASDAQ:NVDA), according to Kreinces.
Of course, there are risks with holding any leveraged ETF for more than a day or a few days and the longer one of the products is held, the more those risks are amplified.
“Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period,” according to ProShares, TQQQ's issuer.
What's Next: For those willing to roll the dice on a long-term position in TQQQ, a small position is advisable, but with patience, what starts as a minnow could morph into a whale.
“Past performance can never guarantee future results, but a continuation of the TQQQ growth rate above would turn $500 into $2 million within 19 years,” writes Kreinces. “Even if the TQQQ rate of return falls by half, to 28% annualized, a $500 investment could still reach $2 million in 34 years. Given this extraordinary long-term growth potential, we named TQQQ the 'American Dream ETF.'”
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