TQQQ - Is It A Good Investment for a Long Term Hold Strategy?

A Viable Strategy for Long Term TQQQ – Use Bonds with TMF SkiptomaincontentSkiptosecondarymenuSkiptoprimarysidebarSkiptofooterTQQQhasgrowninpopularityafteradecade-longragingbullmarketforlargecapgrowthstocksandspecificallyBigTech.Butisitagoodinvestmentforalongtermholdstrategy?Let’sdivein.Disclosure: Someofthelinksonthispagearereferrallinks.Atnoadditionalcosttoyou,ifyouchoosetomakeapurchaseorsignupforaserviceafterclickingthroughthoselinks,Imayreceiveasmallcommission.Thisallowsmetocontinueproducinghigh-quality,ad-freecontentonthissiteandpaysfortheoccasionalcupofcoffee.Ihavefirst-handexperiencewitheveryproductorserviceIrecommend,andIrecommendthembecauseIgenuinelybelievetheyareuseful,notbecauseofthecommissionIgetifyoudecidetopurchasethroughmylinks.Readmorehere.ContentsVideoWhatIsTQQQ?ButWhatAboutVolatilityDecay?DrawdownsAreImportant100%TQQQIsNotAGoodInvestmentforaLongTermHoldStrategyTQQQvs.QQQAViableStrategyforLongTermTQQQ–UseBondswithTMFAddressingConcernsOverBondsReducingVolatilityandDrawdownsandHedgingAgainstInflationandRisingRatesWhatAboutDCA/RegularDeposits?TQQQ/TMFPieforM1FinanceConclusionVideoPrefervideo?Watchithere:WhatIsTQQQ?TQQQisa3xleveragedETFfromProSharesthataimstodeliver3xthedailyreturnsoftheNASDAQ100Index.ExplaininghowaleveragedETFworksisbeyondthescopeofthispost,butIdelvedintothatabithere.Basically,thesefundsprovideenhancedexposurewithoutadditionalcapitalbyusingdebtandswaps.Thisgreaterexposureusuallycomesataprettyheftycost,inthiscaseanexpenseratioof0.95%atthetimeofwriting.The“normal”1xfundQQQhasanexpenseratioofabout1/5thatat0.20%.Thesefundsaretypicallyusedbydaytraders,butrecentlythereseemstobemoreinterestinholdingthemoverthelongterm.TQQQhasbecomeextremelypopularinrecentyearsduetothebullrunfromlargecaptech,whichcomprisesahugepercentageofthefund.There’sevenanentirecommunityonRedditdedicatedtothissinglefund.ButWhatAboutVolatilityDecay?ThedailyresettingofleveragedETFsmeansthefundonlyprovidesthereturnmultiplerelativetotheunderlyingindexona daily basis,notnecessarilyoverthelongterm.Becauseofthis,volatilityoftheindexcaneatawayatgains;thisisknownas volatilitydecay or betaslippage.Unfortunately,thefinancialblogospheretookthescary-sounding“volatilitydecay”andranwithittoerroneouslyconcludethatholdingaleveragedETFformorethanadayisacardinalsin,ignoringthesimpleunderlyingmaththatactuallyhelpsonthewayup.Inshort,volatilitydecayisnotasbigofadealasit’smadeouttobe,andwewouldexpecttheenhancedreturnstoovercomeanyvolatilitydragandfees.DrawdownsAreImportantI’mnotonetoparrotthe“leveragedETFscanbewipedout”idea(thankstomoderncircuitbreakers),butifQQQdropsby5%,TQQQdropsby15%.Peopletendtofocusonvolatilitydecayandforgetthatmajordrawdownsareactuallythebiggerconcernhere.Thisisbecausesimplemathagaintellsusthatitrequiresgreatgainstorecoverfromgreatlosses:Asasimplisticexampleusingdollars,supposeyour$100portfoliodropsby10%($10)to$90.Younowrequirean11%gaintogetbackto$100.100%TQQQIsNotAGoodInvestmentforaLongTermHoldStrategyThegraphaboveillustratesintheorywhya100%TQQQpositionisnotagoodinvestmentforalongtermholdstrategy.ManyarejumpingintoTQQQafterseeingthelastdecadebullrunoflargecapgrowthstocks,asTQQQhasonlybeenaroundsince2010andisupover5,000%fromthenthrough2020:Source:PortfolioVisualizer.comLooksgreat,right?Notsofast.Thisiscalledrecencybias–usingrecentbehaviortoassumethesamebehaviorwillcontinueintothefuture.Asweknow,pastperformancedoesnotindicatefutureperformance.Moreover,adecade–especiallyonewithoutamajorcrash–isaterriblyshortamountoftimeininvestingfromwhichtodrawanysortofmeaningfulconclusions.TQQQvs.QQQSoweneedtogobackfurthertogetabetterideaofhowTQQQperformsthroughmajorstockmarketcrashes,whichwecandobysimulatingreturnsgoingbackfurtherthanthefund’sinception.Goingbackto1987forTQQQvs.QQQtellsasomewhatdifferentstory:TQQQvsQQQ.Source:PortfolioVisualizer.comNoticehowifyoubuyandholdTQQQalone,itisbasicallyatiminggamblethatdependsheavilyonyourentryandexitpoints.Basically,itcantaketoolongfortheleveragedETFtorecoverafteramajorcrash.AftertheDotcomcrashof2000,TQQQdidn’tcatchuptoQQQuntillate2007rightbeforeitcrashedagainintheGlobalFinancialCrisisof2008.HadyouboughtinJanuary2000rightbeforetheDotcomcrash,you’dstillbeintheredtoday:TQQQvsQQQ.Source:PortfolioVisualizer.comSofarIhaven’teventouchedonthepsychologicalaspectsofthisidea.Mostinvestorsseverelyoverestimatetheirtoleranceforriskandcan’tstomachamajorcrashwitha100%stocksposition,muchlessa300%stocksposition.HoldingTQQQthroughtheDotcomcrashwouldhaveseenanear-100%drawdown.AViableStrategyforLongTermTQQQ–UseBondswithTMFTheabovegraphstellus100%TQQQisonlyaviablestrategyifwecanperfectlypredictandtimethemarket,whichweknowisbasicallyimpossible.Sohowcanwemakeitwork?Byusingahedgetomitigatethoseharmfuldrawdowns.DiversificationisyourfriendwithleveragedETFs.Treasurybondsofferthegreatestdegreeofuncorrelationtostocksofanyasset.Iexplainedherewhyyoushouldn’tfearthem.TMFisaverypopularleveragedETFforlong-termtreasurybonds.ThisisthesamebasisofthefamousHedgefundieStrategy.ThisideaisalsoextendedwithotherassetslikegoldinmyleveragedAllWeatherPortfolio.Onceagain,thebeautiful60/40portfolio–inthiscase3xfor180/120exposure–emergesasthebestoption(atleasthistorically)intermsofbothgeneralandrisk-adjustedreturns:Source:PortfolioVisualizer.com.Clicktoenlarge.Whileweexpectlowerbondreturnsinthefuture,itdoesn’tmeanTMFwon’tstilldoitsjob.Thinkofitasaparachuteinsurancepolicythatbailsyououtinstockcrashes.AlsoremembertheNASDAQ100isbasicallyatechindex,posingaconcentrationrisk,andgrowthstocksarelookingextremelyexpensiveintermsofcurrentvaluations,sotheynowhavelowerfutureexpectedreturns.Forthesereasons,I’mafanofusingUPROinstead(theHedgefundiestrategy).AddressingConcernsOverBondsI’vegottenalotofquestionsabout–andalotofthecommentsindiscussionsonTQQQstrategiesfocuson–theuse,utility,andviabilityoflong-termtreasurybondsasasignificantchunkofthisstrategy.I’llbrieflyaddressandhopefullyquelltheseconcernsbelow.Again,bydiversifyingacrossuncorrelatedassets,wemeanholdingdifferentassetsthatwillperformwellatdifferenttimes.Forexample,whenstockszig,bondstendtozag.Those2assetsareuncorrelated.Holdingbothprovidesasmootherride,reducingportfoliovolatility(variabilityofreturn)andrisk.Commoncommentsnowadaysaboutbondsinclude:“Bondsareuselessatlowyields!”“Bondsareforoldpeople!”“Longbondsaretoovolatileandtoosusceptibletointerestraterisk!”“Corporatebondspaymore!”“Interestratescanonlygoupfromhere!Bondswillbetoast!”“Bondsreturnlessthanstocks!”Sowhylongtermtreasuries?Itisfundamentallyincorrecttosaythatbondsmustnecessarilylosemoneyinarisingrateenvironment.Bondsonlysufferfromrisinginterestrateswhenthoseratesarerisingfasterthanexpected.Bondshandlelowandslowrateincreasesjustfine;lookattheperiodofrisinginterestratesbetween1940andabout1975,wherebondskeptrollingattheirparandpaidthatsweet,steadycoupon.Bondpricingdoesnothappeninavacuum.We’vehadseveralperiodsofrisinginterestrateswherelongbondsdeliveredapositivereturn:From1992-2000,interestratesrosebyabout3%andlongtreasurybondsreturnedabout9%annualizedfortheperiod.From2003-2007,interestratesrosebyabout4%andlongtreasurybondsreturnedabout5%annualizedfortheperiod.From2015-2019,interestratesrosebyabout2%andlongtreasurybondsreturnedabout5%annualizedfortheperiod.Newbondsboughtbyabondindexfundinarisingrateenvironmentwillbeboughtatthehigherrate,whileoldonesatthepreviouslowerratearesoldoff.You’renotstuckwiththesameyieldforyourentireinvestinghorizon.Weknowthattreasurybondsareanobjectivelysuperiordiversifieralongsidestockscomparedtocorporatebonds.ThisisalsowhyIdon’tusethepopulartotalbondmarketfundBND.Ithasbeennotedthatthisgreaterdegreeofuncorrelationbetweentreasurybondsandstocksisconvenientlyamplifiedduringperiodsofmarketturmoil,whichresearchersreferredtoascrisisalpha.Again,rememberweneedandwantthegreatervolatilityoflong-termbondssothattheycanmoreeffectivelycounteractthedownwardmovementofstocks,whichareriskierandmorevolatilethanbonds.We’reusingthemtoreducetheportfolio’svolatilityandrisk.Morevolatileassetsmakebetterdiversifiers.Mostoftheportfolio’sriskisstillbeingcontributedbystocks.Thisone’sprobablythemostimportant.We’renottalkingaboutbondsheldinisolation,whichwouldprobablybeabadinvestmentrightnow.We’retalkingabouttheminthecontextofadiversifiedportfolioalongsidestocks,forwhichtheyarestilltheusualflight-to-safetyassetduringstockdownturns.Specifically,inthiscontext,thepurposeofthebondssideispurelyasaninsuranceparachutetobailyououtinastockmarketcrash.Thoughtheyprovidedamajorboosttothisstrategy’sreturnsoverthelast40yearswhileinterestratesweredropping,we’renotreallyexpectinganyrealreturnsfromthebondssidegoingforward,andwe’reintrinsicallyassumingthatthestockssideistheprimarydriverofthestrategy’sreturns.Evenifrisingratesmeanbondsareacomparativelyworsediversifier(forstocks)intermsoffutureexpectedreturnsduringthatperioddoesnotmeantheyarenotstillthebestdiversifiertouse.Similarly,short-termdecreasesinbondpricesdonotmeanthebondsarenotstilldoingtheirjobofbufferingstockdownturns.Historically,whentreasurybondsmovedinthesamedirectionasstocks,itwasusuallyup.Interestratesarelikelytostaylowforawhile.Also,there’snoreasontoexpectinterestratestorisejustbecausetheyarelow.Peoplehavebeenclaiming“ratescanonlygoup”forthepast20yearsorsoandtheyhaven’t.Theyhavegraduallydeclinedforthelast700yearswithoutreversiontothemean.Negativeratesaren’toutofthequestion,andwe’reseeingthemusedinsomeforeigncountries.Bondconvexitymeanstheirasymmetricrisk/returnprofilefavorstheupside.Again,Iacknowledgethatpost-Volckermonetarypolicy,resultinginfallinginterestrates,hasdriventheparticularlystellarreturnsoftheragingbondbullmarketsince1982,butIalsothinktheFedandU.S.monetarypolicyarefundamentallydifferentsincetheVolckerera,likelyallowingustoaltogetheravoidrunawayinflationenvironmentslikethelate1970’sgoingforward.Bondpricesalreadyhaveexpectedinflationbakedin.DavidSwensensummeditupnicelyinhisbookUnconventionalSuccess:“Thepurityofnoncallable,long-term,default-freetreasurybondsprovidesthemostpowerfuldiversificationtoinvestorportfolios.”Ok,bondsrantover.Ifyoustillfeelsomedissonance,thenextsectionmayoffersomesolutions.ReducingVolatilityandDrawdownsandHedgingAgainstInflationandRisingRatesIt’sunlikelythatanyofthefollowingwillimprovethetotalreturnofastrategylikethis,andwhetherornotthey’llimproverisk-adjustedreturnisupfordebate,butthoseconcernedaboutinflation,risingrates,volatility,drawdowns,etc.,and/orTMF’sfutureabilitytoadequatelyserveasaninsuranceparachute,maywanttodiversifyabitwithsomeofthefollowingoptions:LTPZ–longtermTIPS–inflation-linkedbonds.FAS–3xfinancials–bankstendtodowellwheninterestratesrise.EDC–3xemergingmarkets–diversifyoutsidetheU.S.UTSL–3xutilities–lowestcorrelationtothemarketofanysector;tendtofarewellduringrecessionsandcrashes.YINN–3xChina–lowlycorrelatedtotheU.S.UGL–2xgold–usuallylowlycorrelatedtobothstocksandbonds,butalong-termexpectedrealreturnofzero;no3xgoldfundsavailable.DRN–3xREITs–arguablediversificationbenefitfrom“realassets.”EDV–U.S.TreasurySTRIPS.TYD–3xintermediatetreasuries–lessinterestraterisk.TAIL–OTMputoptionsladdertohedge tailrisk.MostlyintermediatetreasurybondsandTIPS.WhatAboutDCA/RegularDeposits?ThebacktestsabovebuyandholdTQQQwithastartingbalanceof$10,000andnoadditionaldeposits.Somewillpointoutthataninvestorwillusuallyberegularlydepositingintotheportfolioandthatthiswouldchangetheresults.Sincethemarkettendstogoupandsincemajorcrashesaretypicallyinfrequent,regulardepositsof$1,000/monthactuallydoesn’tchangetheendresult:Source:PortfolioVisualizer.com.Clicktoenlarge.TQQQ/TMFPieforM1FinanceYou’llneedtorebalanceastrategylikethisregularly.Iusedquarterlyrebalancinginthebacktestabove.YoumightwanttouseM1Financetoimplementthistypeofstrategy,asthebrokermakesrebalancingextremelyeasywith1click,andtheyevenfeatureautomaticrebalancingthroughwhichnewdepositsaredirectedtotheunderweightasset.IwroteacomprehensivereviewofM1here.Here’salinkfortheM1piefor60/40TQQQ/TMF.ConclusionDon’tgoallinanddon’tbuyandholdTQQQ–oranyleveragedstocksETF–“naked”forthelongtermwithoutahedgeofsomesort,becausesometimestheysimplycan’trecoverfrommajordrawdowns.ThelastdecadehaslookedgreatforTQQQ,butdon’tsuccumbtorecencybias.TMFislikelythemostsuitablehedgeforfundslikeTQQQandUPRO.Forthosewithaweakerstomachwhostillwanttouseleverage,checkoutmydiscussiononleveringuptheAllWeatherPortfolio.DoyouuseTQQQinyourportfolio?Letmeknowinthecomments.Disclosure:IamlongUPROandTMFinmyownportfolio.InterestedinmoreLazyPortfolios?Seethefulllisthere.Disclaimer: WhileIlovedivingintoinvesting-relateddataandplayingaroundwithbacktests,Iaminnowayacertifiedexpert.Ihavenoformalfinancialeducation.Iamnotafinancialadvisor,portfoliomanager,oraccountant.Thisisnotfinancialadvice,investingadvice,ortaxadvice.Theinformationonthiswebsiteisforinformationalandrecreationalpurposesonly.Investmentproductsdiscussed(ETFs,mutualfunds,etc.)areforillustrativepurposesonly.Itisnotarecommendationtobuy,sell,orotherwisetransactinanyoftheproductsmentioned.Doyourownduediligence.Pastperformancedoesnotguaranteefuturereturns.Readmylengthierdisclaimerhere.RelatedPostsThe3BestCommoditiesETFsToInvestinCommoditiesin2022The7BestGoldETFsToDiversifyWithShinyMetalin2022The11BestFidelityETFsForLow-CostSectorExposureSecondGrader’sStarterPortfolioReviewandETFPieAcornsvs.RobinhoodBrokerageComparison(2022Review)AboutJohnWilliamsonAnalyticalandentrepreneurial-mindeddatanerd,usabilityenthusiast,Boglehead,andOxfordcommaadvocate.IleadthePaidSearchmarketingeffortsatGildGroup.I'mnotabigfanofsocialmedia,butyoucanfindmeonLinkedInandReddit.ReaderInteractionsCommentsReallyenjoyedreadingyourarticle.Lookforwardtoreadingmore.WhatareyourthoughtsonusingTQQQlongterminthe3signalor9signalstrategyasproposedbyJasonKellyinhisbook“The3%Signal”?Thankyou,TreyCobbReplyThanks,Trey.Idon’tknowwhatthosestrategiesare.I’mnotafanofmarkettimingingeneral;mytechnicalanalysisdaysarebehindme.ReplyVerythorougharticle.Thankyou.Didyouhappentocompareyour60/40TQQQ/TMFto55/45TQQQ/TMF?Iamcuriouswhichoneperformsbetter(histortically).Isuspectthedifferenceissmall,butnotknowingisreallybotheringme.Haha.Thanksforyourtime.ReplyNo.Thepointwasnottofindanoptimalallocationoreventosuggestthatasastrategy,butmerelytoshowthatdiversifyingisprobablyprudentwhendealingwithLETFslikeTQQQ.ReplyItseemsthatyouusedportfoliovisulaizer.comtosimulatelongterm(before2010)gains.ButIamnotabletosimulateitforTQQQcausethesystemkeepssaying“ThetimeperiodwasconstrainedbytheavailabledataforTQQQ”.Howdidyoudothat?ReplyAsnoted,createdmyownsimulationdata.ReplyHi,greatarticle.Buthowdoyougetreliablepre-2010dataforTQQQ?Asyoumentioned,thefunddidn’texist…ReplyAsmentioned,createdmyownsimulationdatausingtheunderlyingindex.ReplyIamlongTQQQwithcoveredcallsout-of-themoneycoveredcallsatvariousexpirationdatesandarangeofstrikes.Forexample,takealookatthepremiumofsellingtheJan,2024$270call.Ithasbeeninarangebetween$25and$30.Now,considerre-investingthepremiumreceivedanddoingmorebuy/writesofTQQQ.Myoverallportfolioisabout66%TQQQ.OftheaccountsthatareTQQQ,theyhaveamixofabout60%in-the-moneycoveredcalls,andabout40%thatarestillout-of-themoney.Again,everyTQQQsharehasacoveredcallassociatedwithit.ReplyCongrats.ReplyI’mnotsureIunderstandwhyonewoulddothis.It’sbasicallylimitingtheextremeupsideofTQQQ,ofwhichisthereasontobuytheETFinthefirstplace.Itseemslikealotofbusyworkthatmayendupgettingmarginallybetterperformance,ifatall.ReplyAgreed.Manytendtomissthefactthatcoveredcallscaptheupside.ReplyGreatinsight.Thankyouforshare.Ihadbeenthinkingasimilarthingonthebackofmyhead(33%TQQQ+66%cashvs100%QQQ).Iamgladyoudidthesimulationout!Whatdoyouthinkaboutbuyingaprotectiveputoptionatletsay80%strikepricequarterly?Willthatbeenoughtocoverthepotentialdrawdownfromanyquarter?Thanks!ReplyNotsure.Idon’tmesswithoptionsnowadays.ReplyHelloJohn,greatarticle,thankyouforwritingit!HowdidyougettheQQQdataandthetreasurybondsasfaras1985?I’mparticularlyinterestedinthetreasurybondsdata:theETFwitholdestdatathatIcanfindisTLT,butitonlydatesbackto2003,afterthedotcombubble.IdidsomebacktestingandIgotthebestperformance(inthelongterm,bothduringbullandbear)byusinga5xQQQthatisrebalancedyearly.Haveyoutriedanythingsimilar?Wouldyoupersonallyconsiderusing5xETFsorrebalancingyearly?LeverageSharesseemstobetheonlyproviderof5xETFs,asfarasIknow:https://leverageshares.com/en/short-and-leveraged-etps/Thankyou!!ReplyThanks,Simone!Ijustdownloadedhistoricalreturnsdata.ForbondsjustfindalongtreasurymutualfundlikeVUSTX.NoIwouldnotuse5x.ThoseproductsarenotETFs.ReplyHiJohn,WouldyouconsiderusingVIXYforshort-termhedgingagainliquiditycrisis?e,.g.Mar9toMar20lastyear?Also,whatisyourtakeonTLTvsTMF:https://seekingalpha.com/article/4037686-why-tmf-will-tend-to-underperform-tlt-long-termWoulditmakemoresensetousemarginforTLTinsteadofbuyingTMFdirectly?ThanksReplyIdon’ttrytotimethemarket.VIXfuturesareaninsurancepolicythatisn’tworththepremiuminmyopinion.Can’tusemargininanIRA.ReplyGreatarticle.I’mstillbaffledastohowyoucanseethereturnsforHFEAandthe60/40TQQQ/TMFportfolioandstillonlyhave10%ofyourtotalportfolioallocatedtoHFEA….Youdon’tthinkyou’lllookbackonedaywithregret?ReplyThanks,Adam.HowcanIonlyhave10%allocatedtoit?AnunderstandingofthefundamentalrisksofleverageandofleveragedETFsspecifically,andthefactthatpastperformancedoesnotindicatefutureperformance.Don’tsuccumbtorecencybiasandoutcomebias.Reply«OlderCommentsLeaveaReplyCancelreplyYouremailaddresswillnotbepublished.Requiredfieldsaremarked*CommentName*Email*Savemyname,email,andwebsiteinthisbrowserforthenexttimeIcomment.Don'tsubscribeAllRepliestomycommentsNotifymeoffollowupcommentsviae-mail.Youcanalsosubscribewithoutcommenting. 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