Ok, please don't run me off the board. New around here.

I bought a 3x leveraged S&P500 ETF (UPRO) and Nasdaq ETF (TQQQ) a couple months ago. I kept trying to figure out the catch and I still haven't. Clearly there is a risk I don't understand.

My thought process was as follows.
1) I'm uncomfortable with margin in my own account but I shouldn't be party to a margin call in these etfs.
2) I plan on holding a long time. So if the market goes up 10% a year I should see 30% returns. Obviously same effect if it goes down.

What risk am I missing? Did I do something stupid? Currently TQQQ is up 21% from where I purchased. UPRO is down over 3%

Decay. Leveraged ETFs are not meant to be held long-term.

What do you classify as long term?

Decay is pretty straight-forward and the basic idea is explained by geometric averages. The example below uses your example (which is hyperbole to show the magnitude, this happens little by little).

So I invest $1,000 in a non-levered ETF that goes up 10% one day, down 10% the next day. You end up at $1,000*1.1=$1,100, then $1,100*.9=$990. So you've lost 1%.

Then I invest in a 3x levered ETF that goes up 30% one day and down 30% the next day. You end up at $1,000*1.3=$1,300, then $1,300*.7=$910. So you've lost 9%. So not just 3x loss, but 9x loss.

And now just to get back to breakeven on your initial investment you need the underlying index the next day to be up 3.3% just to get back to $1,000 on the levered ETF while a non-levered ETF would be at $1,022.64.

Decay wouldn't happen if you didn't go up and down, but indexes don't move just one way in the real world. There's a lot more to it (more active management means more fees, eventual reverse splits, counterparty risk, etc.), but this is the east part to understand for most beginners.

reineraggie09 said:

---

What do you classify as long term?

---

Anything longer than a day or two typically. I trade them intraday only.

Easiest way to visualize decay is to put two on a chart and find a period when QQQ is dead flat.

For example, from Sep 7, 2022 to today. QQQ = 0% growth. TQQQ = 16% loss.

So with TQQQ you need a period of big growth.

I think it would have been possible to hold long duration at times in the long bull run of the 2010s, but that ship has sailed. And even then, you'd have really needed to have big huevos during dips. The psychological barrier is the biggest obstacle to holding long in favorable market conditions.

For me, the only thing I do with TQQQ anymore is sell naked calls against it (while holding QQQ and/or long-dated QQQ calls). I put the decay to work for me.

Buck Compton said:

---

reineraggie09 said:

---

What do you classify as long term?

---

Anything longer than a day or two typically. I trade them intraday only.

---

This

Is there .5 leveraged etf? If so, would that mean it's guaranteed to make money relative to the market? like a reverse decay?
Intellectually I realize that the smaller the leverage, the closer to cash you become.

Wait. Would that work?

Let's start with $100 in QQQ and its 0.5 ETF, HQQQ.

Day 1, QQQ up 10%
QQQ $110, HQQQ $105.

Day 2, down 10%.
QQQ $99, HQQQ $99.75

Well I'll be...

SVXY is -.5x the VIX.

I'm still in my Hedge Fundies Adventure (started September of '19). Includes both UPRO, TQQQ and TMF. CAGR is ~7%. It's been a ride.

Red Pear Realty said:

---

Buck Compton said:

---

reineraggie09 said:

---

What do you classify as long term?

---

Anything longer than a day or two typically. I trade them intraday only.

---

This

---

This is where I disagree. You buy UPRO as a swing trade. As long as the uptrend is continuing, you hold it. Can make a lot of money in the bear market/correction if you time the reversals right.

Same thing goes for BOIL. What hurts you is the chop, not simply holding onto it

Hmm

Seems like you did something stupid. Just confirming.

Here for Hesgefundies adventure. Not a great time to be in it but my bet is over the long term the market will go up enough to shrug off volatility decay. I've only got my Roth IRA in it so a minority of the portfolio.