Proshares UltraPro Short QQQ (NASDAQ: SQQQ) is an ETF that is a leveraged way of speculating on the Nasdaq100. To unpack that, Proshares is just the name of the provider. UltraPro is their name for their 3x leveraged products. Short means that we’re trying to track that index as it goes down - we profit from downwards moves, lose from upward. QQQ is the ticker of the most popular straight vanilla ETF on the same index. So, what we’ve really got here is a way of betting on the top 100 shares on NASDAQ - so, largely the big tech companies - falling in value. The index is weighted, meaning that we have a bit of this, more of that larger company and so on, so that we match that overall performance. And, note again, this is short. That is, we profit when the index falls.
The final part is that leverage. There are ETFs which just track the index - there are ETFs which track near any index in fact. Some are then 2x leveraged, this is 3x. That means that, by design, each move in the underlying produces a three times that move in the price of this instrument. This is, of curse, just absolutely grand when we guess the direction of travel of Nasdaq right - very painful indeed when we get it wrong.
S, in short, what we’ve got here is a three times the Nasdaq 100 index fund going down instrument.
ProShares UltraPro Short QQQ stock price from Google Finance
As we can see being short Nasdaq this past 6 months would not have been a winning move. This is where the leverage starts to hurt, by being wrong about the direction we lose three times as much money.
But then we shouldn’t use SQQQ as a long term instrument anyway. Because in order to gain the leverage, and also the short position, the ETF is made up of a mixture of options and futures. These have significant dealing costs within the fund itself. They’re also reset each day. This means that over time a leveraged ETF is guaranteed to lose money as a position. Perhaps not absolutely, but certainly relative to building the same position through the use of other instruments.
This means that SQQQ, in common with other highly leveraged ETFs should not be used for long holds. In fact, it’s really only for intraday trades. Perhaps as a speculation on immediate price movements, perhaps as a hedge against other positions. Even holding it overnight is not generally thought of as a sensible trade.
The basic rule is that leveraged ETFs are for immediate and short term trading. They’re also, obviously, risky because of the leverage. If that’s what is being looked for then they’re a fine instrument. If it isn’t then, well, use something else to trade into the same position and exposure.