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Trades From This Week So Far:
Closed Options: (100%)
$AMD $3> $3.55
Another day of uneasiness in the markets. Big tech names like AAPL, FB and GOOGL have come out of excellent quarters and their earnings all beating expectations. After nothing happening on the FED speech, markets started climbing slowly and the S&P finished flat.
I'm taking this week as a big success so far, even though I haven't gotten into many short term options positions, but my long term buy and hold portfolio is remaining intact and stable. A big earnings week for tech coupled with a Powell speech has been known to shake things up, and so far since Monday I am basically flat.
My Bull Case For 3X Leveraged ETF's
A lot of people always ask me why I like 3X ETF's so much and what are the risks of investing in them. If you search online, most sources will tell you to stay away from them because there is drag, and that they are only good for short term investing, not long term buy and hold. First of all, let me explain what drag means.
If a 1X ETF's price is $100 and it falls to $90, down -10%, it's 3X counterpart should go from $100 down to $70, or -30%. Now the 1X ETF needs to increase by 11.11% to recover back to $100 :( $10/$90=0.1111 ). Yet the 3X counterpart needs to increase by almost 43% to recover back to $100 : ( $30/$70=0.4285 ). But if the 1X recovers only 11.11%, the 3X should in theory increase by 33.33%, making the price only $93 while the 1X has recovered in full to $100. That is a drag of $7.
This makes perfect sense, yet the case studies and back tests that I have done are not giving the same data in practice. Take a look at these back tested charts comparing portfolios owning the 1X vs a 3X.
QQQ vs TQQQ over 10 years with starting capital of $10,000. Overall the TQQQ experienced some drag, however finishing the 10 years beating the QQQ by more than 9 times.
Here is a back test from January 2018 to present with a starting balance of $25,000 and contributing $500/month, or $6,000/year. TQQQ wins again at 400% over less than 3.5 years. It is always a good idea to be adding monthly, or dollar cost averaging. This allows you to capture the dips. There were a few points where the TQQQ was underperforming the QQQ, most notable the Covid dip, however it pulled through in the end. More than 100% per year from a buy and hold position is nothing to laugh about.
Next I wanted to back test SOXL (a 3X semiconductor ETF), TQQQ (3X Nasdaq), QLD (2X Nasdaq), and SPY in the last 10 years. Starting balance all $25,000 and monthly $500 contributions. SOXL and TQQQ both won this one, although SOXL coming out barely ahead of TQQQ. 2011 and 2012 were tough years for SOXL, but afterwards it out performed. Overall, I would have to say TQQQ is the better choice since it has superior diversification. SOXL is just to concentrated in semiconductors which can be bad if that sector is underperforming. If you can handle the huge swings in SOXL, it is good to hold. Just last March it dipped 40%. SOXL will put hairs on your chest.
Last, I we compare the same as above but over the last 3.5 years; $25,000 stating with $500/month contributions. SOXL overall did better, but wasn't until the Covid lows where it really shined. However, I think that most of this is due to the massive chip shortage, which isn't ending anytime soon. SOXL has a 25% cash position still, and has a lot of room to run in my opinion.
In summation, contrary to popular belief, I believe 3X leveraged ETF's are a great vehicle for investment and growth. If you believe that the US economy will experience growth and stock prices will increase, why would you hold a 1X compared to a 3X? I think that most of the naysayers are older, possibly boomer, investors that don't want to take even the slightest risk, but that makes sense because the closer I get to retirement my portfolio will continually get less risky. However, right now I believe the US will see increased growth and asset prices and buying the 1X SPY, compared to the 3X SPXL, is just way to boring for my background (BTC). However, if there is a recession or crash looming on the horizon, I'll be selling off most or all of the leveraged positions and putting the capital into something more tame during those economic cycles. Overall, I think they do have decent diversification; they are US major index ETFs after all. They are just a little more spicy.