ProShares Short QQQ (SQQQ) ETF: An expensive way to go broke

The ProShares UltraPro Short QQQ ETF (SQQQ) stock price has been in a freefall for a long time. The fund has crashed by over 99% in the past five years. It has also dropped by over 73% in the past 12 months. In this period, it has underperformed the TQQQ ETF, which is up by over 174% in the past 12 months and by 447% in the past 5 years.

TQQQ vs SQQQ ETFs

The SQQQ ETF is a leveraged fund that seeks to generate returns that are 3x the daily performance of the Nasdaq 100 index. In this case, the fund’s objective is to achieve this goal within a single day. 

For example, if the index rises by 1% in a given day, the ETF will rise by 3%. Similarly, if the index retreats by 1%, the fund’s stock will retreat by 3% in the same period. While it is not its goal, this ETF does well when the Nasdaq 100 index is in a downward trend. For example, it jumped by over 82% in 2022 as the index plunged by 22%.

The TQQQ ETF has a similar performance. It jumped by 174% in 2023 as the Nasdaq 100 index jumped by more than 50%. 

Therefore, investing in the SQQQ ETF is one way you can make money if you believe that technology stocks will not do well in a certain period. However, I believe that this fund is a highly expensive way to go broke, especially when you have a long-term horizon. 

First, it is not a cheap ETF. It has an expense ratio of 0..95%, which is higher than most generic funds. Invesco QQQ and QQQM ETFs charge just 0.20% and 0.15%, respectively. This means that a $100k investment in the fund will cost about $950 in fees if it remains unchanged.

The second reason why I’d avoid the SQQQ ETF is that it is difficult to Sleep Well at Night (SWAN) with it in a portfolio. For one, while historical performance is not always a good indicator of what to come, it makes sense to learn from it. 

The key lesson is that American stocks goes up over the long term. These equities recovered after the Great Depression in 1929. They also thrived after the oil embargo of the 70s, the dot com bubble of the early 2000s, the Global Financial Crisis (GFC), and the recent Covid-19 pandemic.

Therefore, since history is all we have, we can assume that technology stocks will continue doing well in the coming years. If this happens, we can assume that the Nasdaq 100 index will maintain its uptrend. Consider the recent note from JPMorgan in their stocks outlook for 2024:

“Today’s environment tends to mark a sweet spot for stocks. Inflation that’s between 2% and 3% has historically shown the strongest average returns for the S&P 500. Earnings growth is accelerating again after the majority of sectors already went through corrections over the last year.”

So, does this mean that I support the TQQQ ETF instead? Actually no. While technology stocks will likely do well in the long-term, investing in TQQQ is still risky because of the leverage it has. 

Therefore, as I wrote in my SWAN portfolio article this week, I prefer going for old school ETFs like QQQ, SPY, and MOAT. In this case, I am always comfortable with moderate gains instead of the supersized returns promised by leveraged ETFs.

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