Best Leveraged ETF during low volatility environment
Leveraged and inverse ETFs are very popular with traders who use them for hedging or speculation. Leveraged ETFs have produced excellent returns following the 2008 financial-economic crisis.
Proshares leveraged ETF TQQQ which tracks Nasdaq 100 has made over 200% market return during the last five years.
These massive leveraged ETF returns have caught the attention of investors despite the possibility of significant loss of their capital during market downtrends.
Leveraged ETF TQQQ Chart
Leveraged ETF Goals
The goal of a leveraged ETF is to provide double or triple the return of the underlying index on a daily basis before expenses and fees.
There is no guarantee that the objectives defined by these leveraged ETFs will be achieved.
These leveraged ETFs are sophisticated investment vehicles that should be used with caution and strategies especially if you are investing for the long run.
Inverse ETF Goals
There are also some leveraged ETFs that inversely correlate with the return of the underlying security.
The goal of an inverse ETF is to provide double or triple the return of the underlying index on a daily basis before expenses and fees during the market downturn.
These leveraged ETFs can quickly amplify gains of your investment during periods of significant market volatility.
Popular leveraged and inverse ETFs
ProShares UltraPro Nasdaq-100 Bull 3x leveraged ETF- TQQQ ETF
ProShares UltraPro Nasdaq-100 Bear 3x inverse ETF-SQQQ ETF
Direxion Daily Semiconductor Bull 3x leveraged ETF- SOXL ETF
Direxion Daily Semiconductor Bear 3x inverse ETF- SOXS ETF
Direxion Daily Biotech Bull 3x leveraged ETF- LABU ETF
Direxion Daily Biotech Bear 3x inverse ETF -LABD ETF
Direxion Small Cap Bull 3x leveraged ETF-TNA ETF
Direxion Small Cap Bear 3x inverse ETF-TZA ETF
Direxion S&P 500 Bull 3x leveraged ETF-SPXL ETF
Direxion S&P 500 Bear 3x inverse ETF-SPXU ETF
Proshares Ultra QQQ (Nasdaq-100) Bull 2x leveraged ETF-QLD ETF
Proshares UltraShort QQQ (Nasdaq-100) Bear 2x inverse ETF-QID ETF
Proshares Ultra S&P 500 Bull 2x leveraged ETF-SSO ETF
Proshares UltraShort S&P 500 Bear 2x inverse ETF-SDS ETF
Best time to add leveraged ETFs in a long-term portfolio
We know the risks of these leveraged ETFs.They can be helpful in a long-term portfolio during periods of low market volatility and economic expansion.
Inverse ETFs can serve as a short-term portfolio hedge during periods of high volatility.
Central banks around the globe are raising rates in order to combat inflation. Central banks will eventually stop raising rates.
When we reach that point, a new bull market will start in the United States, and the fear market gauge will be subdued.
It will be the best moment for leveraged ETFs to be deployed to achieve better returns than the SP500 return.
Leveraged and inverse ETF strategies for growing a portfolio quickly
- Select a leveraged or inverse ETF with a decent trading volume
- Dollar Cost average a leveraged or inverse ETF investment
- Schedule consistently an investment into leveraged or inverse ETF
- Diversify by using a few different leveraged ETFs in your portfolio
- Evaluate periodically leveraged or inverse ETFs portfolio at least once each year and take profit if the market is trending down
- Consider adding an inverse ETF to a leveraged ETF during a period of extreme volatility
Leveraged ETF TQQQ performance
If you invest constantly at the beginning of each month $100 starting in January in the leveraged ETF TQQQ, you will gain close to 1% this year as of August 15, 2022, while all broad indexes are significantly down.
The total amount invested is $800. Total shares are 20.76. The stock closing price as of August 15, 2022, is 38.89.
Return is $7(20.76X38.89-800).
The return percentage is 1%(7/800)
If you invest constantly at the beginning of each month $100 starting January 1, 2021, in the leveraged ETF TQQQ, you will gain close to 43% at the end of the 2021 year.
If you invest constantly at the beginning of each month $100 starting January 1, 2020, in the leveraged ETF TQQQ, you will gain close to 86% at the end of the 2020 year.
The bottom line, is leverage ETF contrary to the belief of certain investors, can provide an excellent return during a bull market.
What if instead of using leveraged ETF, we invest the same way into the underlying security?
In this case, we use Invesco exchanged-trade funds QQQ ETF that track Nasdaq 100 instead of leveraged ETF TQQQ.
QQQ is allocated across several sectors but the majority is allocated to the technology sector.
Buying QQQ allows you to automatically invest in popular technology stocks such as Apple, Microsoft, Amazon, Google and Tesla.
| Allocation of Invesco QQQ ETF | |
| Information Technology | 50.89% |
| Consumer Discretionary | 16.42% |
| Communication Services | 15.94% |
| Consumer Staples | 6.22% |
| Health Care | 5.80% |
| Industrials | 3.38% |
| Utilities | 1.35% |
| Not Classified | 0.16% |
Source:Invesco
Nasdaq QQQ ETF top holdings
| Apple |
| Microsoft |
| Amazon |
| Tesla |
| Alphabet |
| Nvidia |
| Meta Platforms |
| Pepsico |
| Costco |
If you invest constantly at the beginning of each month $100 starting in January 2022 in the QQQ ETF, you will gain close to 4% this year as of August 15, 2022.
If you invest constantly at the beginning of each month $100 starting January 1, 2021, in the QQQ ETF, you will gain close to 14% at the end of the 2021 year.
If you invest constantly at the beginning of each month $100 starting January 1, 2020, in the QQQ ETF, you will gain close to 27% at the end of 2020 year.
Can leveraged ETF go to zero or negative?
What will happen to the leverage ETF TQQQ when the underlying index Nasdaq is down at least 33% in one day?
The objective of the leverage ETF TQQQ is to outperform three times the return of Nasdaq therefore you can technically lose all your money. This will happen only during a severe stock market crash.
Please don’t count on circuit breakers to save you from losing your entire investment.
In 2020, the price of US oil West Texas Intermediate WTI turned negative for the first time in US history.
In 2008, the underlying asset was down 41%. Fortunately for investors, TQQQ was not yet created. Otherwise, investors who were not hedged would have lost their entire investment.
| Year | QQQ |
| 2008 | -41.68% |
| 2002 | -37.66% |
| 2001 | -32.78% |
| 2000 | -36.93% |
How do use leveraged ETFs in order to minimize losses and maximize portfolio return?
Portfolio diversification is necessary in order to minimize risk. Investors should take into account the volatility of the entire portfolio.
An example of leveraged ETF portfolio will be to combine leveraged ETF TQQQ, SPXL, and TBT.
| Leveraged ETFs | Description | Beta (5Y Monthly) |
| TQQQ | ProShares UltraPro QQQ (TQQQ) | 3.5 |
| SPXL | Direxion Daily S&P 500 Bull 3X Shares (SPXL) | 3.15 |
| TBT | ProShares UltraShort 20+ Year Treasury (TBT) | -4.88 |
What if a portfolio is built on the basis of 60% equity and 40% bond using leveraged ETFs above?
Suppose that you invest $100 each month into this portfolio ($30 in TQQQ, $30 in SPXL, and $40 in TBT) starting January 2022. You will significantly outperform the indexes.
Your portfolio return as of August 15, 2022, will be negatively impacted if you invest a lump sum for example $1000 at the beginning of the year in addition to the $100 monthly amount.
| Ticker | No Lump Sum | With Lump Sum |
| TQQQ | 1% | -20% |
| SPXL | 6% | -4% |
| TBT | 12% | 27% |
Are leveraged ETFs safe?
Even though there is a risk that leveraged ETFs can technically go to zero, I believe that it is in the best interest of leveraged ETF fund managers to avoid this scenario.
It is difficult to hedge unsystematic risk therefore we need to learn to be patient.
Chasing everyday stock market headlines can make investors panic and then make bad decisions.
The ability to potentially mitigate heavy losses and take advantage of opportunities are the keys to investment success.
Learning to control emotion is as important as the underlying assets that you choose to invest in.
Exercise, meditation, a healthy lifestyle, and good sleep can be excellent tools for controlling stress.
Investing is a marathon and remember, always keep your investment as simple as possible.
Key Takeaways from investing in leveraged ETFs
- Leveraged ETFs investments are very risky, especially during periods of high volatility. Investors can lose their entire capital if the underlying indexes happen to fall at least 33%. Investors using leveraged ETFs in their portfolio must learn to take a profit at least once a year.
- Leverage ETF is a very useful portfolio management tool for growing a small account if used strategically.
- Leverage ETF works better during periods of low market volatility.
- Leveraged ETF uses financial derivatives therefore, their expenses and fees are often significantly higher than the ETFs tracking the underlying indexes
- Stay diversified. Don’t put all your eggs in one basket. Leveraged ETFs should be used in the context of portfolio diversification.
- Dollar Cost averages your investment monthly. Using a lump sum investment can be detrimental to your portfolio during downtrends.
- Stay small. Don’t invest the biggest portion of your capital into leveraged ETFs for long-term
- Without risk, there is no reward. If you are a long-term investor with at least a 10 years time horizon, adding a small portion of your investment into leveraged ETFs strategically is not a bad idea at all.
- The Fed will eventually stop raising rates when inflation is under control. Hopefully, we are not in recession.
ProShares UltraPro Nasdaq-100 Bull 3x leveraged ETF- TQQQ ETF
Direxion S&P 500 Bull 3x leveraged ETF-SPXL ETF
ProShares UltraShort 20+ Year Treasury (TBT)
Full Disclaimer
This post is for information purposes only. Please consult with your own financial advisor if you need investment advice.
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