The ProShares UltraPro QQQ ETF (NYSEARCA: TQQQ) is usually the most traded ETF on the American markets. Recently, an average daily volume of 190 million or so, $12.5 billion in market value of that. That's really pretty big. The Vanguard Information Tech (NYSEARCA: VGT) is a tiny fraction of that, maybe 700k in volume. Yet they both aim to track the NASDAQ Index (So, the top tech companies, more than anything) and the Vanguard one has a lower management fee. So, why the outrageous differences in volumes?
The difference is in leverage. VGT is unleveraged - it doesn't borrow in order to juice up the returns. That also means that it doesn't lose as much when prices decline of course. The ProShares UltraPro range is, by contrast, aiming to get 3x the NASDAQ return. That means leverage - usually achieved by using futures and options rather than simply holding the underlying stocks. Leverage does mean rising faster as the underlying rises - but also greater losses if we're on the wrong side of the market.
Vanguard Information Tech ETF from NASDAQThe way the two are constructed means that they're useful for different purposes. VGT is a buy and hold investment. It's something that - if we should wish of course - we can tuck away in the back of a portfolio and just leave there. Doing that to the ProShares UltrPro range would be guaranteed to lose us money. Simply because the use of futures and options means that there are significant losses inside the fund over time. TQQQ looks to match 3x NASDAQ - but only on that day. At the close of business it then resets and starts all over again the next. This just does mean inevitable losses of some fraction of a percentage point each day. Something that will really hurt over long holding periods.
The design matches what people use the two for. TQQQ is designed for intraday trading. For taking a view - a speculation if you like - on where tech shares are going today. That's what explains the huge volumes, as people dip in and out quickly. VGT, on the other hand, is for those looking to take a long term position. Thus very much lower trade in the instrument.
The two are seemingly similar, both attempt to track the NASDAQ 100. But the internal construction of the instruments - that leverage - means they should be used for entirely different purposes. Investment in the one, speculation in the other.
