QLD: 2x leveraged Nasdaq-100 ETF, balance between QQQ & TQQQ (NYSEARCA:QLD)

Holding leveraged ETFs for long periods is often discouraged due to volatility decay. However, the alluring outperformance of the 3x Nasdaq ETF (TQQQ) in the recent extended bull market for over a decade has gotten investors excited. While the Nasdaq-100 (QQQ) has performed excellently itself, it has been trounced by TQQQ handily. Of course, this a somewhat biased sample as the period from 2011 (TQQQ inception) to today has been marked with an unrelenting upwards trend. I dive into some of the major risks with investing in TQQQ and it’s performance in bear markets in a previous article.

With 3x leverage, the volatility and risk in bear markets may be too much to stomach for most investors. Yes, in the long run your portfolio will likely recover but investor psychology plays a huge part. You often have to hold on to your leveraged holdings for many years to recover, something people often cannot do if they see 50-80%+ losses.

Instead, investors may be able to stomach such losses better with a lower leveraged ETF for the Nasdaq. It may not result in as much gains, but if the reduced downside causes investors to hold on for longer, then the average leveraged investor may actually make more money with 2x leverage than 3x leverage.

This is where the 2x leverage Nasdaq-100 ETF, ProShares Ultra QQQ ETF (QLD) comes in. This ETF is offered by the same company that manages TQQQ and has the same expense ratios at 0.95%, though it’s significantly less popular. QLD has an AUM of about $5B and average volume of 6M. TQQQ has a 3x the AUM and also more than 15x the volume. Investors shouldn’t worry much about the liquidity however, as due to TQQQ’s higher volatility, QLD typically has a lower premium/discount spread.

Of course, the investor psychology logic also follows for the baseline Nasdaq-100 ETF. Let’s go through some recent bear markets or downturns to see how all three of these ETFs performed. By looking at the maximum drawdowns and time to recovery, you as the investor can decide what level of risk you’d like to take and how strongly you believe you can hold your investments through.

Fed Taper 2022

With inflation running rampant and the economy recovering incredibly well from the pandemic, the Federal Reserve has planned for several rate hikes in 2022, with the first meeting coming in March. This has hit growth stocks, a large component of the Nasdaq, quite hard. While we have not yet recovered from this crash, note that 3x leverage would have put a portfolio down 40%.

Covid Crash

The Covid Crash was largely unexpected by most investors. What’s noteworthy here is that the markets recovered fairly quickly by most bear market standards. QLD recovered only half a month after QQQ did, so an investor willing to wait it out with QQQ wouldn’t have had to wait much longer if they held QLD instead.

It’s worth noting that since the recovery, both QLD and TQQQ leverage have generally outperformed QQQ most of the time. However, after the most recent down turn, QLD has come out slightly on top while TQQQ has underperformed QQQ.

2018 Fed Rate Hikes

This downturn is probably one of the most similar to the one we’re going right now as it was largely attributed to the rate hikes by the Federal Reserve. QLD took only 1 more month to recover than QQQ at 7 months vs 6 months while TQQQ took an entire year.

Holding until today, both QLD and TQQQ would have handily beat QQQ. QLD actually spent significant part of 2019-2020 out performing or matching TQQQ only to fall behind in the bull market 2021. However, with the crash in 2022, the performance difference has minimized significantly.

Great Recession

The Great Recession was the last major extended bear market. It look QQQ about 3 years to recover versus QLD at 4+ years. QLD did not catch up for a full 6 years. TQQQ was not around at this time, so it is not possible to directly evaluate but it likely would have taken a significantly longer time to recover.

Fortunately, since catching up in 2014 after about 6 years, QLD has crushed QQQ in total return.

Dotcom Bubble

Neither leveraged Nasdaq ETF was available at this time, probably for the best. QQQ alone lost 80% of its value over 3 years and took 15 years to recover. Based on some simulations in my previous article, TQQQ likely would not have recovered until 2020, easily 20 years. QLD would likely fall somewhere in between 15-20 years.

And while investing in QQQ is still the rage these days due to its recent outperformance against SPY, note that since the Dotcom Bubble, it still has not caught up to SPY.

Conclusion

QLD can provide a reasonable balance between risk and reward. Investors do not have to chase a high leverage to chase high rewards like with TQQQ. By reducing max drawdowns and time to recovery in bear markets, investors can utilize psychology in their favor when holding leveraged ETFs for longer periods.

It’s very important for investors when considering using leverage on the Nasdaq-100 to see historical performance during downturns and decide which movements they could tolerate and set their allocations accordingly.