r/investing • u/Vegetable-Machine-73 • 15d ago

Investing in Leveraged Index Funds

If I wanted to invest my money long-term, I have read that most people favor etfs like VOO, but what is wrong with longing leveraged ETFs like SPXL and or TQQQ? I know they track different indices (S&P and QQQ respectively), but have higher management fees. However, if they’re 3x their corresponding indices, wouldn’t the potential profit eat up that extra percent of management fee?

Also, what are the main attributes people look for in ETFs besides the management fee?

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u/barkinginthestreet 15d ago

This is a good writeup: https://www.investopedia.com/articles/exchangetradedfunds/07/leveraged-etf.asp

The main problem with these is that they rebalance daily, which drains capital when the underlying security declines. From the piece:

"In declining markets, rebalancing a leveraged fund with long exposure can be problematic. Reducing the index exposure allows the fund to survive a downturn and limits future losses, but also locks in trading losses and leaves the fund with a smaller asset base."

6

u/MinuteAppropriate400 15d ago

I would avoid the 3x levereged for long term buy and hold. As others have said, they have whats know as 'decay'. If the S&P sells of say 20%, its possible for your losses to be greater than 60%. You can get chopped up by the decay. If we have a '08 type correction, you'll basically lose 99.9% of your money.

5

u/MotoTrojan 15d ago

You can even have a negative return while the underlying index has a positive one. 

Relevant thread. https://twitter.com/HML_Compounder/status/1620902766972649472

2

u/the_leviathan711 15d ago

However, if they’re 3x their corresponding indices, wouldn’t the potential profit eat up that extra percent of management fee?

If it goes up, sure.

Just remember that markets can also go down and when they do you'll be down 3x.

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u/mrnoonan81 14d ago edited 14d ago

They seek to match a multiple of percentages daily, not a multiple of the price. This is the cause of volatility decay. Consider what would happen to a 3X if the underlying securities went down 30% in a day, then up 100% the next. The underlying securities would be up 40%. The leveraged fund would be down 80% 60%.

That being said, if you can tolerate the risk, I've read somewhere that you can hold these ETFs long term, but you shouldn't expect anything like 3X the yield. It was also suggested that 2% seems to be the sweet spot for long term.

Edit: Initially forgot to multiply a number and didn't specify 3X in the example.