ETFs
This ETF Turned $10,000 into Over $1.5 Million in Just 14 Years: Should You Buy It Now?
Since the end of the financial crisis about 15 years ago, the technology sector has generally had a great time. A prolonged period of historically low interest rates has helped fuel innovation, the stock market has avoided any major recessions, and many of the biggest tech companies have performed particularly well.
This has fueled strong performance in the technology-heavy sector. Nasdaq100 hint. One exchange-traded fund (ETF) that works particularly well is the ProShares UltraPro QQQ ETF (NASDAQ: TQQQ), which has turned a $10,000 investment into over $1.5 million since its inception in 2010.
What is the ProShares UltraPro QQQ ETF?
The ProShares UltraPro QQQ ETF is an exchange-traded fund that aims to produce three times the daily returns of the Nasdaq 100 Index. It is a type of ETF known as a leveraged ETF , meaning it uses derivative securities and/or borrowed money to amplify returns to the desired level.
In other words, if the Nasdaq 100 rises 2% on a given day, the ProShares UltraPro QQQ ETF will rise approximately 6%. If the Nasdaq 100 falls 1%, you can expect the leveraged ETF to fall 3%.
The historic performance was spectacular
The ProShares UltraPro QQQ ETF has been a spectacular investment, especially for those who have held stocks for a long time. Here is its performance over certain periods, compared to the Nasdaq 100 index.
|
1 year |
114.3% |
38.4% |
|
3 years |
29.7% |
40.2% |
|
5 years |
340.5% |
158.3% |
|
10 years |
2,360% |
464% |
|
Since creation (February 2010) |
14,330% |
1,060% |
Data source: yCharts. Returns until 05/15/2024.
One thing to note is that the long-term performance of the ETF is well over three times the returns of the Nasdaq 100. This is because the ETF is designed to produce three times the daily returns of the index. I’ll spare you a long discussion of the math, but the general idea is that it’s about compounding returns at work.
This is the same fundamental reason why Warren Buffett Berkshire Hathaway has produced around 20% annualized returns over the long term, compared to around 10% for S&P500, but Berkshire’s cumulative return since 1965 is 4,384,748% compared to 31,223% for the benchmark index. This is the power of long-term compounding when an investment performs particularly well.
Risks and other things to keep in mind
First, it’s important to note that the ProShares UltraPro QQQ ETF’s stellar long-term performance has a lot to do with lucky timing. In short, if the ETF had launched just before the financial crisis, its performance since inception would have been very different.
The story continues
However, it began less than a year after the market bottomed and experienced the longest bull market in history. Although such a scenario could potentially repeat itself, I wouldn’t count on it. Past performance of an investment is not a guarantee of future results.
Additionally, even though a leveraged ETF magnifies gains, it also magnifies losses in bad times. Historically, it’s not uncommon for investors to lose most or all of their money in leveraged ETFs when times are tough. In fact, when growth stocks collapsed in 2022, the ProShares UltraPro QQQ ETF lost more than 60% of its value in less than six months. Only invest if you are prepared to deal with fluctuations as massive as this.
Finally, it is worth noting that the ProShares UltraPro QQQ ETF has a relatively high gross expense ratio of 0.98%. For context, the Invesco Nasdaq 100 ETF (NASDAQ: QQQM), which is an unleveraged index fund that tracks the same benchmark, has an expense ratio of 0.15%. This amount is rather high for an index fund, but makes sense given the specialized and complex nature of leveraged ETFs.
Should you invest?
Unfortunately, there is no single answer to the question: “Is the ProShares UltraPro QQQ ETF right for me?” » If you don’t have a very high risk tolerance and can’t handle big price fluctuations, this probably isn’t for you. If volatility is right for you, it might be worth a look, but it would be wise to limit your position size to an amount you can afford to lose if things don’t work out. not the way you want.
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Matt Frankel holds positions at Berkshire Hathaway. The Motley Fool ranks and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
This ETF Turned $10,000 into Over $1.5 Million in Just 14 Years: Should You Buy It Now? was originally published by The Motley Fool