What is it:

TQQQ is an ETF that tracks the performance of an underlying basket of stocks. In TQQQ’s case it tracks the QQQ ETF which is composed of top technology stocks in the Nasdaq 100. However, there is one twist: TQQQ is triple leveraged, meaning that for every percent that the QQQ goes up, TQQQ will go up 3%. This entails certain risks and furthermore, TQQQ only guarantees this on a daily basis. Leverged ETF's are rebalanced at the end of each day. Meaning over the long term, TQQQ may fail to match their 3 times leverage that they advertise. In a strong and high liquidity kind of market triple leveraged ETFs will likely outperform their 3 times leverage benchmark, but they only advertise the 3x on a per day basis. Looking at TQQQ over the course of five years, it has made a killing because of such a strong and not incredibly volatile market. This allowed TQQQ to return over 1,600% while QQQ itself - the asset that it is tracking - has returned 244%. That is more than 6 times the return of the underlying, which is twice the return that they advertise. That is because of how these funds are structured.

How Leveraged ETF's Work:

Leveraged ETF's don't hold the actual stocks, because if they did, they would have a return identical to the QQQ. Therefore, they have to use their own leverage and they create this leverage by utilizing derivatives like options, swaps, and debt. Yes, that's right, managers of these funds borrow money to be able to achieve these kinds of returns. This leads me to why I believe that TQQQ is one of the best places to put your money right now at all time highs pretty much across the board. Interest rates are expected to rise, but the recent moves by the Fed indicate that they will be pretty slow to act. We know that this is good for technology stocks, but it's even better for funds that track technology and borrow money. Not only are they going to be tracking a fast growing sector, but the way processes that they use to track the sector will remain cheap. This easy money is really really good for borrowers which is a big part of the way TQQQ achieves (actually they overachieve) their leverage. Now, this is very short term, there is almost no doubt that rates will go up. This will affect technology as a whole and TQQQ, but I personally believe that technology is the sector to be in. I believe that big blue chip technology companies are now the blue chip, consumer staples and money safe havens. I believe that these companies are the best way to put a million dollars away and not be worried about growth or too much speculation. The top assets of QQQ are companies like Microsoft, Apple, Google, and Amazon, these companies will be going nowhere anytime soon. This is why I believe that if you have to own a leveraged ETF, you have to own TQQQ. When you deal with leverage, you do not want volatility, you want steady year after year gains because just like options, it can really be all or nothing at some times. When you are dealing with derivatives and debt, loses are multiplied and it can be really difficult for leveraged ETF's to climb itself out of the hole. Leveraged ETF's can very well underperform the asset that you're supposed to be tracking due to time decay and failures in the strategies that are used to achieve that leverage.

This formula shows is that if the security goes up by X one day and down by X the next, your return will be negative X^2. Ex. Up and then down 5%, will yield you a return of negative .25%.

100 - (up 5%) = 105 - (down 5%) = 99.75 = Down .25% or 5%^2 = .25% = Down .25%

Furthermore:

This graph shows what will happen to a leveraged and non leveraged index over the course of a volatile week. Even though the index ends the week positive (over +.1%), the leveraged ETF is still negative.

This shows the difference between the regular index and a leveraged index as the underlying grinds higher. In a situation of the index being up 2% one day and down 1.9% the next, the no leveraged asset will go higher, while the leveraged ETF will slowly decline due to volatility and time decay.

The Bottom Line:

Volatility will kill your gains with leveraged etfs. It is simple math. - A stock that is up 10 percent one day and then down ten percent the next, will be down overall. Even with equivalent moves in the stock, negative returns are always going to be more powerful. This is where leverage hurts you because when you get negative moves down, they are going or be amplified. However, I do not see any reason why we should see heavy volatility in the Q’s over the next five years. I don't see a catalyst for a result any different from what we received the last five years. There is no doubt that returns will not be nearly as good, but I don't see a reason why TQQQ should return less than 3 times the underlying QQQ index over the next 5 years. I think it's entirely possible for QQQ to achieve around 200% returns over the next five years and I think TQQQ will at the very least be able to triple that over the long term. Needless to say, I will be happy with 600% growth in a 5 year time frame. I think TQQQ will be trading over $1000 five years from now. There is no other asset that can exhibit this kind of growth that will be less risky than this investment. There is no other diversified asset, in my opinion, that will be able to achieve 600% growth over the next 5 years. TQQQ is an asset that regardless of the formulas or what “professionals” say, I believe that it is currently a BUY.

Works Cited:

https://www.afrugaldoctor.com/home/volatility-decay-dont-hold-leveraged-etfs-long-term

https://www.youtube.com/watch?v=WoYVmlOxwbA

https://www.fool.com/investing/how-to-invest/etfs/leveraged-etfs/