With the Nasdaq soaring to new heights and the technology sector ranking consistently as the market's best-performing group, it is not surprising that many investors are evaluating technology and Nasdaq-related exchange traded funds (ETFs).
An ETF is similar to a mutual fund, in that it is a pooled investment that holds a portfolio of securities. Unlike a mutual fund, ETFs can be bought and sold throughout the day on stock exchanges like ordinary shares. This allows investors and traders to get exposure to indexes such as the Nasdaq-100, whether for a long-term buy and hold strategy or for scalping day trades.
- The Invesco QQQs ("cubes") is a popular ETF that tracks the Nasdaq-100 Index
- The Nasdaq-100 Index is composed mainly of technology companies and excludes most financial stocks.
- TQQQ is one of the largest leveraged ETFs that also tracks the Nasdaq-100.
- QQQ is perhaps best-suited as a long-term investment for those who want broad exposure to the Nasdaq-100 Index.
- TQQQ is built for short-holding periods and is best suited for day traders.
TQQQ vs. QQQ: An Overview
The Invesco QQQ is an exchange traded fund (ETF) that is widely held and tracks the Nasdaq-100 Index. Its focus is on large international and U.S. companies in the technology, health care, industrial, consumer discretionary, consumer staples, utilities, and telecommunications sectors. The triple-Q was previously called QQQQ.
ProShares TQQQ is also an ETF. However, it is a leveraged product using derivatives and debt to increase the returns to investors. In particular, TQQQ seeks returns that are 3x that of the QQQ.
Among leveraged ETFs, ProShares UltraPro QQQ (TQQQ) is one of the largest with assets under management of $18.56 billion as of July 2022. TQQQ is also one of the more heavily traded leveraged ETFs in the U.S. with an average daily volume of $5.29 billion (compared with QQQ's $21 billion). TQQQ carries an expense ratio of 0.95%.
Due in part to QQQ's popularity, issuers of leveraged ETFs tapped traders' thirst for more exotic ways to play the Nasdaq-100. That includes the ProShares UltraPro QQQ (TQQQ). TQQQ's objective is simple: To deliver triple the daily returns of Nasdaq-100. So if that index rises by 1% on a particular day, TQQQ should jump by 3%.
TQQQ, as is the case with any leveraged ETF, is an instrument best used over intraday time frames, not as a buy-and-hold investment. Investors and traders that do not consider themselves “active” and “risk-tolerant” should eschew leveraged ETFs.
According to ProShares—the largest issuer of leveraged ETFs, leveraged ETFs come with additional risks and nuances not found in traditional ETFs. They state: "Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return, and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks."
TQQQ Pros and Cons
Triple leverage can provide 3x returns in bull markets
Good instrument for index day traders
Very liquid and actively traded for a leveraged ETF
Losses are also amplified 3x
Relatively high fees
Relatively less tax-efficient
Only suitable for very short holding periods
While multiple ETFs offer exposure to Nasdaq indexes, the Invesco QQQ (QQQ) is the king of that group. The $158.3 billion QQQ (as of July 2022) is over 20 years old and is one of the largest plain-vanilla ETFs in the U.S. QQQ tracks the widely followed Nasdaq-100 Index, a benchmark that holds famed technology and internet stocks such as Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Google parent Alphabet Inc. (GOOG), among others.
The highly-rated, large-cap fund was first established in 1999 and works to return results that follow the Nasdaq-100 Index and has a gross expense ratio of 0.20%. QQQ returns quarterly distributions to investors with a distribution yield of just under 0.50%.
QQQ checks many of the boxes long-term investors look for in broad market ETFs. The ETF offers liquid, cost-efficient exposure to a tech-heavy basket of large-cap, innovative companies without burdening investors with stock-picking or the commitment of a technology-specific ETF.
Tech stocks account for the majority of QQQ's weight, with consumer discretionary and communication services names representing another chunk of the ETF's roster. While the Nasdaq-100 is historically more volatile than the S&P 500, QQQ can be held over long time frames while its cousin, TQQQ is definitely a short-term trade.
QQQ Pros & Cons
Broad, low-cost, exposure to the Nasdaq-100
Very actively-traded and liquid
One of the oldest ETFs still in existence
Constructed as a trust, may provide less efficiency compared to a true ETF
Tech-heavy, can be more volatile than S&P 500 ETFs
QQQ or TQQQ: Which Is Better?
The better of these two ETFs will largely depend on your market outlook and time horizon. For long-term buy-and-hold investors, the QQQ is a good choice to get broad exposure to the Nasdaq-100 Index. This may be used in conjunction with other index ETFs to create a well-diversified portfolio for the long run.
For those who believe that the Nasdaq will spike in the short run, the TQQQ may be a better option since it provides leverage. However, because of the structure of leveraged ETFs, the recommended holding period is from intraday to only a few days. Moreover, if the index drops, the TQQQ will lose 3x as much as the QQQ. Therefore, TQQQ may be better suited for day traders or swing traders.
Is QQQ Leveraged?
No. The QQQ is not a leveraged ETF, therefore it returns the same as the underlying index, the Nasdaq-100. The TQQQ is triple-leveraged, so that it returns 3x the index. Thus, if the Nasdaq-100 rises 1%, the TQQQ returns +3%; if it falls by 1%, the TQQQ loses 3%.
What Companies Are in TQQQ?
The TQQQ is a 3x leveraged ETF based on the QQQ (a Nasdaq-100 Index ETF). Because it is leveraged, it uses derivatives contracts to amplify its returns based on how the index performs. As such, it does not actually hold the shares of any companies. Instead, the unleveraged QQQ itself owns the companies in the index.
How Is TQQQ Taxed?
Unlike traditional ETFs, leveraged ETFs like TQQQ have a high turnover and utilize derivatives contracts. These features make them less tax efficient. In general, taxable distributions from such ETFs are taxed as ordinary income.