The ProShares UltraPro Short QQQ ETF (SQQQ) has been one of the worst-performing ETFs in modern times as technology companies have rallied. The fund has crashed by 15% this year as the Nasdaq 100 index rose to almost 6%.
SQQQ ETF has been in a freefallSQQQ has dropped by almost 62% in the past 12 months and ~99% in the past five years. Despite this plunge, the fund still has over $3.36 billion in assets, and data shows that it is still adding assets this year.
In contrast, the ProShares UltraPro QQQ (TQQQ) ETF has been firing on all cylinders as its assets jumped to almost $20 billion. It has soared by 102% in the past 12 months and over 2,230% in the past decade.
SQQQ vs QQQ vs TQQQ ETFs
The main reason for this divergence is the performance of American technology companies. A quick look shows that most tech firms have jumped sharply in the past decade. As a result, we now have 6 companies with a market valuation of over $1 trillion.
The Nasdaq 100 index, which tracks the biggest tech companies in the US, has jumped by over 400% in the past ten years. It has soared by 130% in the past five years and is now sitting near its all-time high.
Technology stocks have done well over the yearsFor starters, the ProShares UltraPro Short QQQ is a leveraged ETF that aims to generate returns that are 3 times the Nasdaq 100 index losses. It does well when the benchmark index is falling in a single day.
For example, if the Nasdaq 100 index falls by 1% in a day, the SQQQ ETF will rise by 3%. At the same time, it is not designed to achieve three times the index losses for a period longer than one day.
SQQQ investors tend to believe that American technology stocks are highly overvalued and that they will pull back. To a large extent, this view is correct, with a company like Nvidia having a price-to-earnings ratio of almost 70.
However, judging by history, there is a likelihood that tech firms will continue doing well in the long term. For one, the US is still a leader in key technologies like artificial intelligence and machine learning.
It is also a major player in technologies that will revolutionize the world in the next few decades.
Most importantly, there is a lot of money sitting in the sidelines. Recent data shows that money market funds hold over $6 trillion in money market funds, which are benefiting from high-interest rates.
The Fed will start to cut interest rates at some point, a situation that will push funds to risker assets like tech stocks.
Therefore, as I have written before, the SQQQ ETF is one of the most expensive ways to go broke. Unlike the Invesco QQQ ETF which has an expense ratio of 0.20%, it has a ratio of 0.95%, giving a spread of 0.75%.
As such, I believe that the SQQQ fund is a highly risky investment even if the ongoing pullback in tech stocks continues.
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