The WSJ/Jonathon Weil Do Not Like TQQQ, but I Do Not Care
A few weeks ago, I read this article from the Wall Street Journal, written by Jonathon Weil. I actually really like him, and he has some genuine pedigree. For example, he is oft-cited as one of, if not the, first person to notice and publish his concerns about Enron. He also wrote an article recently criticizing the… odd accounting practices of MicroStrategy, which I also like. Basically, this is a serious journalist whose writing should be taken seriously. When I saw that this really smart guy wrote an article titled “How Booming Leveraged Funds Can Incinerate Your Money,” in which TQQQ (13% of my portfolio) was explicitly criticized, I decided to double-check my math.
Here is why I still believe in leveraged ETFs like TQQQ.
Mr. Weil points out how TQQQ, while promising 3x leverage, has pulled in about 10% since Nov. 30, 2021, compared to QQQ (the standard ETF) pulling in triple that, ironically. That is cherry-picked a bit, as Nov. 30 was the absolute highest point of that insane COVID bubble. Sure, during specific intervals, TQQQ underperforms QQQ. That is the tradeoff you pay, but if you believe that QQQ will increase by 10% over the next year, then you can think that TQQQ will increase by 30%. If, instead, QQQ (or hereafter referred to as Q) decreases by 10% then TQQQ (hereafter referred to as T) will decrease by about 30%. You make that tradeoff. It is extremely risky.
Then, Weil points out that often, T does not often even get 3x performance, and that T often misses that 3x mark. That is actually a fair critique. If you do the math, T is about 2.5x, but that’s just the cost of doing business. The SEC only allows triple-levered ETFs at most, so the smart fellas over there at Invesco need to err on the side of caution. Also, 2.5x is still pretty nice. T is up 75% this year compared to a proportionately measly 30% from Q.
Third, Weil mentions that these funds, if their underlying assets are more volatile (moving sideways) than directional (moving up or down), then the cost of rebalancing and making the assets fit perfectly can be extremely costly. That is also true, but relatively irrelevant to T holders, as the Q is extremely directional and rarely just moves up 2% and then down 2% for months on end. If Q does start moving in that fashion, then I could understand possible fears, but as of right now, a lack of directionality is not a fear of mine.
Fourth, Weil dunks on single-stock leveraged ETFs, which I am more than fine with. Levered single-stock ETFs are too much, particularly when the underlying asset has little float and low daily volume. When that occurs, the levered ETF has to spend a ton of time and money to root out ways to find their leverage, something they often find in the hyper-risky options market. A single-stock levered ETF on something like Apple or Microsoft is still crazy risky, and T would, in my mind, be preferable, but a single-stock levered ETF on those two would still be worlds better than one on something like MicroStrategy.
T is not a single-stock ETF, so I do not care about that argument, and it is irrelevant to my holding.
Finally, Weil goes on a bit of a tangent relating to this thing called battle shares, an idea so stupid that I refuse to dignify it by explaining the concept, but it is unrelated to T.
In short, Weil had some valid points about T and levered ETFs in general. They are incredibly risky, and you can absolutely lose a ton of money on them, but over the long term, something like T should rake in quite a bit of money. Will you get exactly 3x Q? No, you will not. Will you get about 2.5x Q? Yeah, pretty much. Do you think that the 100 biggest tech companies in America will appreciate in value over the following ten years? If you think they will, then something like T should be perfect for you.
T is getting leverage on a relatively diversified asset and allowing yourself to get access to a ton of tech companies and tap into what might be one of the most profitable modern inventions. I see no problem with having T be 13% of my portfolio. The fact that these points were all that this really smart guy came up with has only made me feel better about T, especially when compared to something like battleshares (eye roll) or levered single-stock ETFs with little float (gambling). Really, Weil sounded more opposed to those much lower-quality ETFs.
Here is an interesting Reddit thread about LETFs, with a few points against and a few points for that Weil did not mention.
