Should you hold leveraged ETFs overnight?
Because of how leveraged ETFs are constructed, they are only intended for very short holding periods, such as intraday. Over time, their value will tend to decay even if the underlying price movements are favorable.
The daily rebalancing of leveraged and inverse ETFs creates a situation that for periods longer than a day or two the return of a leveraged or inverse ETF will deviate from the margin account benchmark.
While the Fund has a daily investment objective, you may hold Fund shares for longer than one day if you believe it is consistent with your goals and risk tolerance. For any holding period other than a day, your return may be higher or lower than the Daily Target. These differences may be significant.
Leveraged ETFs decay due to the compounding effect of daily returns, volatility of the market and the cost of leverage. The volatility drag of leveraged ETFs means that losses in the ETF can be magnified over time and they are not suitable for long-term investments.
How long should you hold inverse ETFs? Inverse ETFs are intended for intraday trading — not longer. Although they can seem simple, inverse ETFs require considerable skill since they rebalance daily.
The SQQQ is meant to be held intraday and is not a long-term investment, where expenses and decay will quickly eat into returns. It is not appropriate as a long-term holding, even among bearish investors.
While the Fund has a daily investment objective, you may hold Fund shares for longer than one day if you believe it is consistent with your goals and risk tolerance. For any holding period other than a day, your return may be higher or lower than the Daily Target.
For those who believe that the Nasdaq will spike in the short run, the TQQQ may be a better option since it provides leverage. However, because of the structure of leveraged ETFs, the recommended holding period is from intraday to only a few days. Moreover, if the index drops, the TQQQ will lose 3x as much as the QQQ.
The graph above illustrates in theory why a 100% TQQQ position is not a good investment for a long term hold strategy. Looks great, right? Not so fast. This is called recency bias – using recent behavior to assume the same behavior will continue into the future.
Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.
Why not invest in 3x leveraged ETF?
A leveraged ETF uses derivative contracts to magnify the daily gains of an index or benchmark. These funds can offer high returns, but they also come with high risk and expenses. Funds that offer 3x leverage are particularly risky because they require higher leverage to achieve their returns.
Because they rebalance daily, leveraged ETFs usually never lose all of their value. They can, however, fall toward zero over time. If a leveraged ETF approaches zero, its manager typically liquidates its assets and pays out all remaining holders in cash.
Leveraged ETFs amplify daily returns and can help traders generate outsized returns and hedge against potential losses. A leveraged ETF's amplified daily returns can trigger steep losses in short periods of time, and a leveraged ETF can lose most or all of its value.
The key word here is "daily." Due to how compounding works, holding SQQQ for longer periods of time may result in unpredictable returns. So, holding SQQQ long term is not recommended as the ETF suffers from significant volatility decay, causing its share price to lose value if held for too long.
In other words, you could potentially be liable for more than you invested because you bought the position on leverage. But can a leveraged ETF go negative? No. If you own a leveraged ETF you can't lose more than your initial investment amount.
The leverage is determined on a daily basis and the returns for any other period usually will not be double or triple the underlying index. In order for the leveraged funds to achieve appropriate levels of assets so they can provide their implied leverage, they have to rebalance daily.
SQQQ presents a compelling option for traders and investors who want to either profit from Nasdaq 100 declines or hedge against losses in a tech-heavy portfolio. However, its leveraged and inverse nature makes it a high-risk, high-reward tool that requires careful consideration and precise timing for practical use.
Holding an inverse ETF for more than a day can produce returns that don't track with the total return of the underlying security. The more volatile the underlying security, the greater the tracking error.
ProShares UltraPro Short QQQ (SQQQ)
If the Nasdaq-100 falls 1% over a day, then the fund is expected to return 3%. Since SQQQ's leverage resets on a daily basis, holding the fund beyond a single day may compound returns and provide results that are different from the target return.
Historically, SQQQ decays around 7-8% per month, though this would likely be around 4-5% per month during a flat market such as that experienced so far this year.
How often does SQQQ pay dividends?
SQQQ Dividend Information
SQQQ has a dividend yield of 8.59% and paid $1.04 per share in the past year. The dividend is paid every six months and the last ex-dividend date was Mar 20, 2024.
QQQ - Volatility Comparison. ProShares UltraPro Short QQQ (SQQQ) has a higher volatility of 12.70% compared to Invesco QQQ (QQQ) at 4.30%. This indicates that SQQQ's price experiences larger fluctuations and is considered to be riskier than QQQ based on this measure.
TQQQ is not designed for long term holding. TQQQ is essentially exposing yourself to 3X the risk. Putting $10K into TQQQ is like putting $30K into QQQ. And, due to the way the ETF works, it will underperform during sideways and down markets, sometimes significantly (like all of 2022).
QQQ usually declines more in bear markets, has high sector risk, often appears overvalued, and holds no small-cap stocks. This ETF allows traders to invest in the largest 100 non-financial companies listed on the Nasdaq.
Pay attention to the impact of volatility decay！ When investing in leveraged ETFs like TQQQ, investors need to be aware of the impact of volatility decay. For example, in a volatile market, if the Nasdaq 100 Index drops by 10% in a day, TQQQ will drop by approximately 30%.
