TQQQ vs. SSO: Which Leveraged ETF Better Fits a Tactical Play?

TradingKey - Leverage is often used by tactical investors in pursuit of achieving above-average returns. TQQQ and SSO are the classic examples of this. 

Both target the amplified Daily Index Movement. However, their sector exposure and volatility are vastly different, especially during times when the markets are turbulent.

TQQQ ETF provides leverage as a result of amplifying (3x) the daily index movement of the NASDAQ-100.

For more detailed information regarding the TQQQ ETF, please refer to the link below:

“What Is TQQQ? How This 3x Leveraged ETF Works”

In June 2006, ProShares launched SSO, the ProShares Ultra S&P 500 series ETF. The goal of SSO is to provide 200% (2x) the daily return of the S&P 500 before fees and expenses.

It currently ranks as the second-largest 2x leveraged broad-market ETF traded in the United States. The basic premise of the operation of the fund is to provide investors with exposure to stocks that represent approximately half of all listed U.S. stocks. By utilizing a proprietary algorithm designed by ProShares, the fund attempts to track the daily performance of an index composed of 500 leading U.S. corporations across multiple industries and to return two times the performance of the index from the previous business day. 

In order to accomplish this, the fund will utilize primarily total return swaps (TRS) and equity index futures to create its leverage, with approximately 65% of its asset allocation to derivatives. The fund will also hold a portion of its fixed income investments in extremely liquid instruments so that it can achieve a balance between capital preservation and leverage efficiency. 

The fund carries an expense ratio of 0.87%. The expense ratio for SSO is similar to that of TQQQ, which is slightly less than that of SSO. It can be traded intraday and supports various strategies using options; however, it does not provide a significant amount of dividends every quarter; therefore, it is not considered an income-producing investment.

TQQQ ETFs are designed to return three times the daily return of the Nasdaq 100 Index. SSO ETFs are designed to return twice the daily return of the S&P 500 Index. 

Both of these funds reset their leverage each day, making them inherently more volatile and increasing (and potentially decreasing) profit and loss. 

Additionally, if any of these indices experience significant increases in volatility, the potential returns will likely be diminished over time.

Based on their lower expense ratios and higher yields, TQQQ appears to be a better investment for fee-conscious and income-generating investors. 

However, these attributes mainly apply to those investors who hold long-term positions, and these two ETFs are designed for short-term investors.

The TQQQ ETF focuses on providing a return three times that of the Nasdaq-100 index (COMP) during a given day, thus being heavily weighted toward technology (approximately 55% of total assets), and much less so toward communication services (approximately 17%) and consumer discretionary goods (approximately 13%). 

The TQQQ ETF has 101 different underlying stocks within it, with the top three holdings being Nvidia, Microsoft, and Apple. Because of these two factors (technology-weighted portfolio and the resetting of leveraged returns every day), the TQQQ ETF has very volatile movements, and it is possible that large losses could occur if the technology sector were to take a downturn.

SSO provides a diversified portfolio that includes 503 separate investments, which is much larger than the majority of other ETFs. 

SSO is not as concentrated as TQQQ, which has a few very large companies such as Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) making up almost all of its holdings. SSO has approximately 35% in technology companies, nearly 13% in financial companies, and approximately 11% in consumer cyclicals compared to TQQQ's concentration in technology.

The TQQQ has had a greater return on investment over a longer period than the SSO; however, the TQQQ also has a substantially larger risk of loss than SSO. 

For instance, TQQQ dropped an all-time low of 81.65% over five years, which is almost double the 46.73% highest drop for SSO. Despite this massive difference in risk of loss, if hypothetical investors invested $1000 into the TQQQ and SSO, after five years, they would have had approximately $2459 and $2585, respectively, or about double their original investments, although the TQQQ experienced a higher degree of volatility than the SSO's results would indicate. 

This difference results from the gap between the beta of TQQQ and the beta of SSO; TQQQ has a greater beta, which indicates that it will move more dramatically up and down than the SSO beta would indicate.

Both funds are decidedly leveraged, high-risk, and high-return vehicles that focus on maximizing returns rather than providing investors with a vehicle for long-term investing. 

 In terms of historical performance over the last several years SSO has outperformed TQQQ.

TQQQ has greater returns than SSO because it has more exposure to technology stocks and provides 3 times the leveraged returns daily. 

However, this higher risk does not equate to higher returns, and TQQQ does not have an investor history or track record to justify those higher risks when rewards are compared with historical performance. 

Specifically, over the last 12 months and the last 5 years, TQQQ and SSO produced nearly identical returns, with TQQQ being twice as volatile as SSO and TQQQ’s beta being greater than SSO.

However, this does not imply that SSO has a lower risk associated with purchasing it, as both funds carry higher risk levels than standard ETFs. But SSO offers investors the same level of equity diversification as TQQQ, and has the advantage of producing smaller fluctuations in share price over time. 

If you are going to invest in either fund then prepare for significant fluctuations in both directions; of the two funds, TQQQ has experienced considerably more volatility with little ultimate financial benefit to investors in recent years.

• Expense ratios are an annual cost that each fund charges as a percentage of the fund's assets for the operational cost of running the fund. 
• Leverage is the use of borrowed funds or derivatives to increase the exposure to the investments, increasing the potential gains but also increasing the potential losses.  
• Drawdown is the percentage decline of a fund from its highest point to its next lowest point over a predefined time period. 
• Beta is the measurement of the volatility of an investment versus the overall market (typically the S&P 500). A higher number indicates greater fluctuations in the investment relative to the market. 
• Dividend Yield measures the amount of annual dividend payments as a percentage of the current price of the stock. Assets Under Management (AUM) is a measure of the total value of assets that a fund has for the investor. 
• Daily Leverage Reset is how leveraged ETFs manage their daily exposure in order to maintain the fixed leverage ratio.

TQQQ & SSO are intended to be short-term (trend) accelerators, rather than long-term investments. They are meant to capture (i.e., trade) very precise, short-term (high conviction) moves in the market. 

Investors must consider the exchange of risk and reward in an investment. While TQQQ offers the possibility of high returns, it also carries high risks. Alternatively, while SSO has less volatility, it also has less upside potential. 

The use of (or the decision to use) one or the other is based on a principle of "Trend is King, Discipline is Key." Leverage will enhance every aspect of an investment—both positive (i.e., profits) and negative (i.e., emotions). Therefore, the strict adherence to one's trading plan will provide the greatest chance of success in leveraged trading.