Established in February 2010 by ProShares, the UltraPro Short QQQ (SQQQ) is an inverse-leveraged exchange-traded fund (ETF) that tracks the Nasdaq-100 Index. The Nasdaq 100 is composed of the largest companies, both domestic and international, listed on the Nasdaq stock market, prioritized by total market capitalization, but excluding financial institutions.
The inverse-leveraged strategy for SQQQ means it attempts to reproduce a daily investment result that is roughly opposite the daily performance of its underlying index, and then multiply those results by a certain factor. The stated objective of SQQQ is to triple the opposite results of the Nasdaq-100.
This means investors in SQQQ are preparing for the greater nonfinancial stock market to struggle. Since the Nasdaq-100 tends to be heavily weighted toward technology, telecommunications, and health care stocks, the SQQQ should tend to perform well when these sectors perform poorly.
All inversely leveraged funds are made up of financial derivatives, and sometimes even derivatives of derivatives. To achieve the opposite of a specific asset, the fund managers have to trade in short positions and swaps, which essentially are bets the underlying security or investment performs poorly.
- The ProShares UltraPro Short QQQ (SQQQ) is a 3x leveraged inverse ETF that tracks the Nasdaq 100.
- It seeks to return the exact results of the Nasdaq 100 index times negative three.
- This ETF follows the Nasdaq 100, which is heavily weighted toward technology and telecommunications stocks.
- The SQQQ is meant to be held intraday and is not a long-term investment, where expenses and decay will quickly eat into returns.
- It is not appropriate to be a long-term holding, even among bearish investors.
The fund provider for SQQQ, ProShares, was launched in 2006 and focuses on specific, targeted and relatively risky satellite holdings. Most of its ETFs are moderately small or very small, and SQQQ is no exception; total assets under management, or AUM, in Q1 2022 is $2.5 billion.
To finance the leveraged inverse position, the ETF also owns a large amount of U.S. Treasury securities from the proceeds of short positions.
SQQQ carries a relatively high expense ratio of .95%. This should not be surprising since the fund strategy requires occasionally liquefying derivative contracts before their optimal point; in-kind redemptions are very tricky for inverse-leveraged ETFs.
It is paramount that investors understand SQQQ is a daily-targeted inverse ETF. ProShares designed this for short-term, high-risk, and high-reward gains in the event the Nasdaq-100 struggles. This fund is not suitable for a long-term hold; investors who buy-and-hold SQQQ find their returns badly damaged by expenses and decay.
Several key factors prevent SQQQ from serving as an acceptable core holding in an investor's portfolio. The first is the short-term focus of the fund; it is not a buy-and-hold ETF. Another area of concern is the fund size; tiny ETFs such as SQQQ can go through wild fluctuations and are always close to closing altogether.
The share prices for SQQQ also bank on a deviation from historical market performance. The Nasdaq-100 Index does not perfectly correlate with total stock market performance, but it is certainly a cyclical index. Since the general trend of the Nasdaq is to grow over time, the long-term outlook for a 3x inverse-leveraged ETF is bleak at best.
Because they utilize margined short positions and derivatives contracts leveraged inverse ETFs experience a negative roll that erodes their value quite quickly. As a result, even in a declining market, holding such an ETF can result in losses if held too long.
Before an investor considers buying SQQQ, he should fit a very targeted profile. First and foremost, the investor should have knowledge of and be comfortable with an inverse-leveraged ETF. Second, the investor must be able to trade quickly or have an adviser/broker who can do the same, to avoid decay.
The investor must also be comfortable with volatility. As of Q1 2022, SQQQ carries a trailing five-year beta of -2.06 and an astoundingly low alpha of negative 81.8. Its Sharpe Ratio is -1.77. While these are considered somewhat in line with the fund category, they are considerably more risky than the average ETF or mutual fund.
There are some advantages to having a daily-targeted leveraged ETF. For example, the fund is considerably more liquid than other funds of its size.
What Is the Best ETF to Short the Nasdaq?
There are several inverse ETFs available that gain when the Nasdaq 100 index falls. The ProShares Short QQQ (PSQ) returns the inverse of the index on a one-to-one basis. The ProShares UltraShort QQQ (QID) is a 2x inverse ETF, and the ProShares UltraPro UltraShort QQQ (SQQQ) is a 3x inverse ETF. The more leverage you have (i.e., 2x or 3x), the more the price movements will be amplified. Leveraged ETFs, however, decay due to their composition. As a result, the more leverage an ETF has, the shorter the holding period you should keep it.
What Is SQQQ Best Used for?
SQQQ is ideal for very short-term short bets against the Nasdaq 100 index. Overall, SQQQ best serves as a very specific and small satellite holding in an aggressive investor's portfolio. It is probably best used as a countercyclical buy for those who are convinced large-cap stocks will suffer in the very near future.
Can You Sell Short QQQ?
Yes. The QQQ, like other ETFs, resembles shares of stock in many ways. As such, if your broker can locate QQQ shares for you to borrow, you can sell them short. In terms of whether shorting a long ETF or going long an inverse ETF is better, it is often up to the trader. For longer holding periods, an inverse ETF may behave in an unusual manner.