I recently graduated from college and am in the process of setting up my Roth IRA with a few thousand dollars from graduation gifts and my signing bonus. Is there any reason why I shouldn't put all of it into triple levered ETFs such as TQQQ and get an average annual return of 45% instead of a measly 15% return from the regular QQQ ETF.
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triple levered etf's derive their value from derivatives that decay over time - they're trading, not investing instruments.
To explain it simply, investing in leveraged products exposes you to time decay. This means that as time goes by, your investment losses value. The reason is because depending on the ETF, the ETF may take on leverage in the form of options to give you the magnified returns.
Additionally, another risk factor to consider is how well does the ETF accomplish it's goal. Just because it's a 3x ETF doesn't mean that the product is designed in a way that if the underlying investment increases by 5%, you'll get 15%. There are numerous ETFS out there that performed worse than I would have imagined relative to the underlying performance.
I would probably wait before putting my money into anything, I personally think we're at an artificial top created by the fed.
triple levered?
Triple Leveraged ETFs are the best option if one wants to be able to describe "slippage" without being an explicit pervert. (It's a serious term related to the return decay from the daily resetting of the leverage factor)
If you look up ‘volatility drag’ that should provide some risk-oriented insight. Geometric returns (which are what you care about as an investor) are equal to average arithmetic returns - standard deviations squared / 2. So if you triple leverage you increase your expected arithmetic returns by a factor of three, but the volatility factor will increase exponentially. If you’re going to use leverage (which it’s good to keep in mind: must be paid for), it’d probably be better to use it to diversify (lowering your volatility when done correctly) rather then concentrating your investments.
I'm going to take a different opinion to most on this thread. Yes, there is decay, but if you can stomach the volatility, the TQQQ will destroy the returns of the underlying over a long period. I think it is a very legitimate thing to take a look at as a 20-something. These products are relatively new, so their true long-term impacts haven't been able to be thoroughly studied, but can be backtested.
The decay gets worse for something like oil or gold which has 0% absolute returns over 15+ year periods.
Give this a read, a strategy that combines using 3x 20yr treasuries and 3x SPY/QQQ, giving you 300% gross exposure and a shockingly low volatility. https://www.bogleheads.org/forum/viewtopic.php?t=288192
Have you backtested 3x QQQ historically? Portfolio Visualizer suggests that 3x QQQ with monthly rebalance would do very poorly since QQQ launced in 1999 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2….
FWIW QQQ had absolute returns of almost 0 from the peak of the tech bubble in 2000 to 2014 or so.
Kelly criterion also suggests that optimal leverage would be
I really wouldn't do it if I were you...read an article on WSJ about people who did that and lost everything
Stick to proven, vanilla instruments (equities, bonds) that while offer more limited upside, won't kill you on the downside
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