Most Traded Leveraged ETFs for Q4 2022

TQQQ, SQQQ, and SOXL are the most traded leveraged ETFs for Q3 2022

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Exchange-traded funds (ETFs) offer investors a straightforward way to own a single security whose performance is based on a much larger basket of securities. Typically, the basket is constructed to track the performance of an underlying index, such as the S&P 500. Likewise, leveraged ETFs provide investors with a single investment vehicle representing a broad basket of securities.

However, leveraged ETFs are much more complex instruments than traditional ETFs and tend to focus their holdings heavily on debt and financial derivatives, such as swaps, to amplify the returns on the index being tracked. Many of these ETFs have been favored by investors over the past two years to exploit the volatility in the markets due to the COVID-19 pandemic and related disruptions in the global and U.S. economies.

Key Takeaways

  • The leveraged exchange-traded funds (ETFs) with the highest three-month average daily volume are TQQQ, SQQQ, and SOXL.
  • The first two ETFs provide leveraged long and short exposure to the Nasdaq-100 index, while the third provides leveraged long exposure to the ICE Semiconductor Index. All three use derivatives, including swaps. These funds reflect continuing high investor interest in the tech-heavy indexes.

Leveraged ETFs often provide investors with the ability to achieve two or three times the daily performance of their index. But some offer 0.5 or 1.5 times, or even inverse leverage, such as -2× and -3× the performance. Thus, leveraged ETFs are suitable only for experienced investors with a high level of risk tolerance. They are most often used as short-term trading vehicles, with most investors exiting their positions in just a day or a few days.

Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities that they represent, and losses can be amplified during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect that they will do so on longer-term returns. For example, a 3× ETF may return 3% on a day when its benchmark rises 1%, but you shouldn’t expect it to return 30% in a year when its benchmark rises 10%. For more details, see this U.S. Securities and Exchange Commission (SEC) alert.

There are 101 leveraged ETFs that trade in the United States, excluding funds with less than $50 million in assets under management (AUM). High trading volumes are the key metric that many investors look at to decide which leveraged ETFs have been generating the most interest. These highly traded ETFs are likely to provide the most liquidity and thus may be easier to trade into and out of.

Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark’s one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn’t expect it to return 10% in a year when its benchmark falls -10%. For more details, see this SEC alert.

There is no benchmark for these funds, and each fund aims at achieving its investment objective on a daily basis. The three funds below are thus not ranked by one-year total return. Instead, they are ranked by trading volume, a measure of liquidity. But for reference, the S&P 500 provided a total return of -8.1% over the past year as of Sept. 9, 2022. The underlying indexes for these funds, the Nasdaq-100 and the S&P 500 Semiconductors Subindex, have a one-year trailing return of -18.5% and -20.1%, respectively, during the same period. The most traded leveraged ETF, based on three-month average daily trading volume, is the ProShares UltraPro QQQ (TQQQ).

We examine the three most traded leveraged ETFs below. All numbers below are as of Sept. 8, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.

ProShares UltraPro QQQ (TQQQ)

TQQQ provides 3× daily long exposure to the tech-heavy Nasdaq-100 Index, a major market index composed of 100 of the largest non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The ETF provides bullish investors with a way to make significant gains on upward movements in the index over a given day.

If the Nasdaq-100 increases 1% over the course of a single day, then the fund is expected to rise 3%. Due to the daily reset feature, holding the fund for longer than a single day will result in compounding of returns and results that are likely to significantly differ from the target return.

TQQQ is a tool for sophisticated investors and is not meant for those with a low risk tolerance or as part of a buy-and-hold investment strategy. The fund holds shares of companies that comprise the Nasdaq-100 and utilizes various swaps instruments to provide leveraged exposure to the index.

ProShares UltraPro Short QQQ (SQQQ)

  • Performance Over One Year: 22.8%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • Three-Month Average Daily Volume: 116,180,120
  • Assets Under Management: $5.4 billion
  • Inception Date: Feb. 9, 2010
  • Issuer: ProShares

SQQQ provides 3× daily short, or inverse, leverage to the Nasdaq-100 Index, a major market index comprising 100 of the largest nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The ETF provides bearish investors with a way to profit from market declines during a given day.

If the Nasdaq-100 falls 1% over a day, then the fund is expected to return 3%. Since SQQQ’s leverage resets on a daily basis, holding the fund beyond a single day may compound returns and provide results that are different from the target return.

SQQQ may not be suited for investors with a low risk tolerance, but it may be useful to sophisticated investors seeking to either hedge or profit from a sharp decline in large-cap tech stocks. Investors in SQQQ should keep track of their holdings as frequently as daily. Like TQQQ, SQQQ provides exposure to the Nasdaq-100 Index the S&P through a variety of swaps.

Direxion Daily Semiconductor Bull 3x Shares (SOXL)

  • Performance Over One Year: -69.6%
  • Expense Ratio: 0.90%
  • Annual Dividend Yield: 0.03%
  • Three-Month Average Daily Volume: 66,335,088
  • Assets Under Management: $3.8 billion
  • Inception Date: March 11, 2010
  • Issuer: Rafferty Asset Management

SOXL seeks to provide 3x daily long exposure to the ICE Semiconductor Index, an index of the thirty largest U.S. listed semiconductor companies. The fund provides bullish investors a way to capitalize on gains across the semiconductor sector over a single day. SOXL has an opposite counterpart, SOXS, which provides 3x daily short exposure to the same index.

SOXL is designed to provide 3 times the return of the benchmark index over only a single day. Holding the fund beyond that timeframe may compound returns and yield a return different from the target. SOXL is designed for sophisticated investors not utilizing a buy-and-hold strategy. SOXL's holdings include tech equities, swaps and other financial instruments.

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