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TQQQ Review – Is It A Good Investment for a Long Term Hold Strategy? - YouTube
Channel: Optimized Portfolio
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tqqq has grown in popularity after a
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decade-long raging bull market for large
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cap growth stocks and specifically big
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tech but is it a good investment for a
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long-term hold strategy let's dive in
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hey guys john williamson here
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optimizeportfolio.com investing in
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personal finance what is tqq
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tqq is a 3x leveraged etf from invesco
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that aims to deliver 3x the daily
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returns of the nasdaq 100 index
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explaining how a leveraged etf works is
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beyond the scope of this video but i
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delved into that a bit in a separate
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video basically these funds provide
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enhanced exposure without additional
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capital by using debt and swaps this
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greater exposure usually comes at a
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pretty hefty cost in this case an
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expense ratio of 0.95 percent at the
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time of this video
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the normal 1x fund qqq has an expense
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ratio of about one-fifth that at 0.20
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percent these funds are typically used
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by day traders but recently there seems
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to be more interest in holding them over
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the long term tqqq has become extremely
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popular in recent years due to the bull
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run from large cap tech which comprises
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a huge percentage of the fund but what
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about volatility decay the daily
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resetting of leveraged etfs means the
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fund only provides the return multiple
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relative to the underlying index on a
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daily basis not necessarily over the
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long term because of this volatility of
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the index can eat away it gains this is
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known as volatility decay or beta
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slippage unfortunately the financial
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blogosphere took the scary sounding
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volatility decay and ran with it to
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erroneously conclude that holding a
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leveraged etf for more than a day is a
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cardinal sin ignoring the simple
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underlying math that actually helps on
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the way up in short volatility decay is
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not as big of a deal as it's made out to
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be and we would expect the enhanced
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returns to overcome any volatility drag
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and fees i'm not one to parrot the
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leveraged etfs can be wiped out idea
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thanks to modern circuit breakers but if
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qqq drops by five percent tqqq drops by
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15
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people tend to focus on volatility decay
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and forget that major drawdowns are
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actually the bigger concern here this is
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because simple math again tells us that
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it requires great gains to recover from
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great losses as a simplistic example
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using dollars suppose your 100 dollar
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portfolio drops by ten percent or ten
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dollars to ninety dollars you now
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require an eleven percent gain to get
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back to one hundred dollars the graph
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shown illustrates in theory why a one
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hundred percent
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tqqq position is not a good investment
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for a long-term hold strategy many are
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jumping into tqq after seeing the last
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decade bull run of large cap growth
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stocks as tqqq has only been around
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since 2010 and is up over five thousand
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percent from then through 2020
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looks great right not so fast this is
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called recency bias using recent
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behavior to assume the same behavior
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will continue into the future
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as we know past performance does not
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indicate future performance moreover a
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decade especially one without a major
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crash is a terribly short amount of time
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in investing from which to draw any sort
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of meaningful conclusions so we need to
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go back further to get a better idea of
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how tqq might have performed through
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major stock market crashes which can be
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done by simulating returns going back
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further than the fund's inception going
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back to 1987 for tqq versus the
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underlying qqq tells a somewhat
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different story notice how if you buy
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and hold tqqq alone it is basically a
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timing gamble that depends heavily on
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your entry and exit points basically it
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can take too long for the leveraged etf
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to recover after a major crash after the
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dot-com crash of 2000 tqq didn't catch
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up to qqq until late 2007 right before
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it crashed again in the global financial
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crisis of 2008. had you bought in
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january 2000 right before the dot-com
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crash you'd still be in the red today so
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far i haven't even touched on the
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psychological aspects of this idea most
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investors severely overestimate their
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tolerance for risk and can't stomach a
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major crash with a 100 stocks position
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much less a 300 percent stocks position
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holding tqqq through the dot-com crash
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would have seen a near 100 drawdown the
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previous graph tells us 100
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tqqq may only be a viable strategy if we
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can perfectly predict and time the
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market which we know is basically
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impossible so how can we make it work
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by using a hedge to mitigate those
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harmful drawdowns diversification is
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your friend with leveraged etfs treasury
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bonds offer the greatest degree of
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uncorrelation to stocks of any asset tmf
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is a very popular leveraged etf for
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long-term treasury bonds this is the
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same basis of the famous hedge fund
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strategy once again the beautiful 6040
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portfolio in this case 3x for 180 120
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exposure emerges as the best option at
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least historically in terms of both
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general and risk-adjusted returns
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while we expect lower bond returns in
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the future it doesn't mean tmf won't
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still do its job think of it as a
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parachute insurance policy that bails
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you out and stock crashes also remember
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the nasdaq 100 is basically a tech index
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posing a concentration risk and growth
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stocks are looking extremely expensive
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in terms of current valuations so they
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now have lower future expected returns
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for these reasons i'm a fan of using you
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pro instead which is the hedge funding
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strategy i've gotten a lot of questions
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about and a lot of the comments and
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discussions on tqq strategies focus on
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the use utility and viability of
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long-term treasury bonds as a
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significant chunk of this strategy i'll
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briefly address and hopefully quell
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these concerns here again by
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diversifying across uncorrelated assets
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we mean holding different assets that
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will perform well at different times for
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example when stocks zig bonds tend to
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zag those two assets are negatively
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correlated we hope for uncorrelation on
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average holding both provides a smoother
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ride reducing portfolio volatility which
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is variability of return and risk common
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comments nowadays about bonds include
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bonds are useless at low yields bonds
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are for old people long bonds are too
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volatile and too susceptible to interest
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rate risk corporate bonds pay more
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interest rates can only go up from here
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bonds will be toast bonds return less
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than stocks so why long-term treasuries
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first it is fundamentally incorrect to
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say that bonds must necessarily lose
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money in a rising interest rate
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environment bonds only suffer when those
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interest rates rise faster than expected
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bonds handle low and slow rate increases
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just fine look at the period of rising
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interest rates between 1940 and about
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1975 where bonds kept rolling at their
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par and paid that sweet steady coupon
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number two bond pricing does not happen
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in a vacuum we've had several periods of
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rising interest rates where long bonds
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delivered a positive return from 1992 to
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2000 interest rates rose by about 3
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percent and long treasury bonds returned
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about 9 annualized for the period from
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2003 to 2007 interest rates rose by
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about 4
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and long treasury bonds returned about 5
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annualized for the period from 2015 to
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2019 interest rates rose by about two
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percent and long treasury bonds returned
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about five percent annualized for that
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period new bonds bought by a bond index
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fund and a rising rate environment will
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be bought at the higher rate while old
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ones at the previous lower rate are sold
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off you're not stuck with the same yield
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for your entire investing horizon we
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know that treasury bonds are an
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objectively superior diversifier
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alongside stocks compared to corporate
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bonds this is also why i don't use the
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popular total bond market fund b and d
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it has been noted that this greater
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degree of uncorrelation between treasury
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bonds and stocks is conveniently
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amplified during periods of market
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turmoil which researchers referred to as
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crisis alpha again remember we need and
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want the greater volatility of long-term
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bonds so that they can more effectively
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counteract the downward movement of
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stocks which are riskier and more
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volatile than bonds we're using them to
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reduce the portfolio's volatility and
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risk more volatile assets make better
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diversifiers most of the portfolio's
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risk is still being contributed by
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stocks for number nine this one's
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probably the most important we're not
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talking about bonds held in isolation
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which would probably be a bad investment
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right now we're talking about them in
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the context of a diversified portfolio
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alongside stocks for which they are
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still the usual flight to safety asset
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during stock downturns specifically in
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this context the purchase of the bond
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side is purely as an insurance parachute
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to bail you out in a stock market crash
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though they provided a major boost to
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this strategy's returns over the last 40
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years while interest rates were dropping
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we're not really expecting any real
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returns from the bond side going forward
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and we're intrinsically assuming that
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the stock side is the primary driver of
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the strategy's returns even if rising
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rates mean bonds are a comparatively
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worse diversifier for stocks in terms of
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future expected returns during that
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period does not mean they are not still
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the best diversifier to use similarly
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short-term decreases in bond prices do
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not mean the bonds are not still doing
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their job of buffering stock downturns
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historically when treasury bonds moved
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in the same direction as stocks it was
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usually up interest rates are likely to
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stay low for a while also there's no
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reason to expect interest rates to rise
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just because they are low people have
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been claiming rates can only go up for
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the past 20 years or so and they haven't
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they have gradually declined for the
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last 700 years without reversion to the
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mean negative rates aren't out of the
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question and we're seeing them used in
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some foreign countries bond convexity
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means their asymmetric risk return
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profile favors the upside again i
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acknowledge that post-volcker monetary
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policy resulting in falling interest
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rates has driven the particularly
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stellar returns of the raging bond bull
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market since 1982 but i also think the
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fed and u.s monetary policy are
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fundamentally different since the
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volcker era likely allowing us to avoid
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runaway inflation environments like the
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late 1970s going forward bond prices
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already have expected inflation baked in
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the late david swenson summed it up
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nicely in his book unconventional
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success the purity of non-callable
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long-term default free treasury bonds
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provides the most powerful
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diversification to investor portfolios
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okay bonds rant over if you still feel
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some dissonance the next section may
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offer some solutions it's unlikely that
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any of the following will improve the
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total return of a strategy like this and
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whether or not they'll improve
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risk-adjusted return is up for debate
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but those concerned about inflation
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rising rates volatility drawdowns etc
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and or tmf's future ability to
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adequately serve as an insurance
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parachute may want to diversify a bit
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with some of the following options
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ltpz which is long-term tips or
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inflation-linked bonds fas 3x financials
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banks tend to do well when interest
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rates rise
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edc 3x emerging markets you can
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diversify outside the us
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utsl 3x utilities which i'm a fan of
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have the lowest correlation to the
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market of any sector and tend to fare
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well during recessions and crashes y i n
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n is 3x china which is lowly correlated
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to the us ugl is 2x gold gold is usually
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lowly correlated to both stocks and
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bonds but it has a long-term expected
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real return of about zero there are also
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no 3x gold funds available now drn 3x
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reits you get an arguable
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diversification benefit from real assets
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edv u.s treasury strips or tyd 3x
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intermediate treasuries both of those
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would have less interest rate risk
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comparatively lastly there's a fund from
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cambria called tail which is out of the
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money put options to hedge tail risk
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most of the fund is intermediate
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treasury bonds and tips so what about
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dca or dollar cost averaging or regular
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deposits the previous back tests buy and
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hold tqqq with a starting balance of ten
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thousand dollars and no additional
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deposits
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some will point out that an investor
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will usually be regularly depositing
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into the portfolio and that this would
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change the results
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since the market tends to go up and
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since major crashes are typically
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infrequent regular deposits of a
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thousand dollars a month actually don't
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change the end result that much you'll
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need to rebalance a strategy like this
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regularly i used quarterly rebalancing
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in the previously shown back tests you
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might want to use m1 finance to
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implement this type of strategy as the
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broker makes rebalancing extremely easy
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with one click and they even feature
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automatic rebalancing through which new
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deposits are directed to the underweight
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asset i'll include links to my
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comprehensive review of the platform and
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a pie to invest in this strategy in
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conclusion don't buy and hold tqqq or
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any leveraged stocks etf naked for the
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long term without a hedge of some sort
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because sometimes they simply can't
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recover from major drawdowns the last
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decade has looked great for tqqq but
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don't succumb to recency bias do you use
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tqqq in your portfolio let me know in
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the comments some of the links below are
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referral links at no additional cost to
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you if you choose to make a purchase or
[874]
sign up for a service after clicking
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through those links i may receive a
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small commission this allows me to
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continue producing high quality content
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on this channel and pays for the
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occasional cup of coffee
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i have first-hand experience with every
[889]
product or service i recommend and i
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recommend them because i genuinely
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believe they are useful also please note
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that while i love diving into investing
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related data and playing around with
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back tests i am not a certified expert i
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am not a financial advisor portfolio
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manager or accountant this is not
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financial advice investing advice or tax
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advice the information presented here is
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for informational purposes only
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investment products discussed are for
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illustrative purposes only it is not a
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recommendation to buy sell or transact
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in any of the products mentioned do your
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own due diligence if you found the
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information in this video helpful
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consider liking commenting subscribing
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and sharing that would help me out and i
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greatly appreciate it you might also
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enjoy some of my other videos here are a
[937]
few
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you
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