3x ETFs
Hi,
Something I never really understood is why people tell me not to invest in a 3x ETF.
I understand the risks associated with it and fees, but if I buy 100 shares of the ETF at $100 and a year later, it is $145 - isn't this a $45 gain regardless? A gain is a gain here right?
How does one lose money on this aside from the expense ratio? I'm looking to hold one of these for several months to park my money.
We’ve discussed this a lot already. Yes, if you have a long-term time horizon buy the 3x. It’s that simple.
“How does one lose money on this aside from the expense ratio”…. Yikes
Aside from the expense ratio, you lose money due to volatility decay. If your hypothetical ETF goes down 10%, you need it to go back up 11.1% to offset that loss in order to break even. Now when you buy 3X leverage, you can see how the numbers start to skew heavily against you if you're in a flat or down market. There is also nothing worse than holding 3X leverage in a flash crash, like for example the flash crash in 1987 or the COVID crash. Those types of sudden and violent moves can wipe you out completely.
3X ETFs are an ideal investment in a long-term trending bull market for reasons that should be clear. They have vastly, vastly outperformed since 2010 because we're in the greatest bull market ever. They are not ideal in very volatile markets, flat markets, or bear markets.
If you wanna get blown up, I ain't gonna try stopping you.
Just don’t be dumb and do your research. Accept the risks and have conviction in your thesis. Nothing inherently wrong with holding 3x leverage. Just know what you’re getting into if you go into ETFs with inherently volatile flat/bear underlyers.
You shouldn't hold 3x ETFs more more than a day because leverage resets daily. Your returns decay beyond a market day. I've made that mistake before. If your able trade options instead or talk to your advisor about risk mgmt lol
Did TQQQ not still return 1,000% over the past 5 years even with the daily mark-to-market? If it’s still performing well above benchmarks then who cares? Am I thinking about this right?
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