Proshares UltraPro QQQ (NASDAQ: TQQQ) is an ETF that is a leveraged way ot tracking the Nasdaq 100. To break this down a little, Proshares is simply the name of the company that organises it. UltraPro is just their name for their 3x leveraged products. QQQ is the ticker of one of the most popular unleveraged Nasdaq index trackers. Nasdaq is the second of American’s stock markets, after the New York Stock Exchange and is also where most of the tech stocks are quoted. The 100 is, of course, the top 100 stocks on Nasdaq by market capitalisation (the so called “weighted” method). Finally, an index is, when stripped of all the jargon, simply a little bit of this one, a touch of that one, so that the index moves as the average of the individual movements of all of those top 100 companies.
So, we’ve an exchange traded fund, which should follow the performance of the tech heavy Nasdaq top companies index. The leverage is the last bit to explain. It’s possible, by using options and futures, to track the performance not of the index itself, but of three times it - thus 3x leverage. This is great if we guess right on which way the index is going - terrible if we get it wrong because we lost money three times faster too.
But that’s what we’ve got here, a three times the Nasdaq index going up fund.
Proshares UltraPro QQQ stock price from Google Finance
OK, NASDAQ’s done well the past 6 months, we’d have made money in this. Except, if we’d held TQQQ for 6 months we wouldn’t have, not really. We might have ended up with more money than we started with but that’s not quite the same thing. We could have made more with the same risk, or the same using a different instrument and less risk.
For exactly because the UltraPro line is leveraged this is why we shouldn’t use them for the long term. In fact, they’re built only to work on intraday trades. This is just a function of how they’re constructed, with those options and futures. Because there’s a time value to such derivatives the fund has to be reset each day. That produces both a price reset and considerable dealing costs within it. This means that holding a leveraged ETF is a good guarantee of losing money against holding the same position in another manner. UltraPro, and other 3x leveraged ETFs, are for intraday trading only. Or, sensibly they’re for intraday trading only.
Nothing wrong with using TQQQ to have a quick gamble on which way the Nasdaq 100 is going to go, or in hedging a position elsewhere. But sensible traders will close out the position by the end of the day.
