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If QQQ3 is Good Maybe QQQ5 is Better

June 10, 2024

I have been sceptical of a 5x leveraged version of QQQ. I thought maybe it was too much of a good thing but the real question is does it work? A first examination suggests that it does.

It is terrifyingly volatile. Peak to trough QQQ3 fell 82.65pc from the all-time high in 2021. QQQ, the unleveraged Nasdaq 100 tracker, fell by 38pc peak to trough but is well into all-time high territory. QQQ5 fell a gut-wrenching 97.5pc and is still way below the 2021 peak.

This might seem like a disastrous performance, off to the study with a shotgun and a bottle of whisky, until we look more closely.

Imagine $-cost averaging with this share, investing a fixed amount every month and the picture looks very different. Below is a monthly chart highlighting the effect of a monthly $-cost-averaging programme.

The strategy is simple. Each month invest a fixed amount in buying QQQ5 shares. Suddenly that vertiginous fall works to your advantage because in 25 months you bought shares lower than the latest price. In only four months did you pay more than the current price?

I have done the sums assuming $100 invested monthly since the shares started trading. This was 30 months ago, so you would have invested $3,000. I then assumed that you bought shares (investing $100 each time) at the closing price for the month. As a result, you would own 5,152 shares priced at $1.516, worth $7,812. Suddenly you are cracking out that bottle of champagne.

Delivers 160pc Profit in Two and a Half Years

You would have made a profit of 160pc in two and a half years and would be well positioned to add significantly to that haul in the coming months and years.

Imagine doing this not with $100 each month but $1,000. You would have invested $30,000 and would have bought 10 times as many shares so 51,520 worth $78,120 at the latest price. You would have made nearly $50,000 in two and a half years and since you were investing over time you could argue that your true commitment was $15,000 for a more than fivefold return.

Scary Losses Halfway Through

The downside is that after 15 months, at the halfway mark, you would have dramatic paper losses which might have seemed irrecoverable. There is no doubt that buying QQQ5 in a bear market is a serious test of nerve but if you hang on in there the results are spectacular.

The killer risk is if the shares drop to nought, but this does not happen. Looking at the chart they tested super-low levels but never went to zero. ChatGBT, when questioned, pointed out that the managers have a strong incentive to make sure that doesn’t happen and 2022 was a severe test of the $-cost averaging strategy with the relevant index falling nearly 40pc.

I conclude that it is a risk worth taking and that QQQ5 can be an exciting investment whenever you start. You could hardly have picked a worse time than December 2021, right at the beginning of a ferocious bear market; yet the strategy still worked.

Juice up the Returns by Acting on Buy Signals

There is something else you might do to beef up the return even more. On a monthly chart buy signals for QQQ5 are relatively rare. There have been three since the ETF was launched. On each buy signal you could add to your shareholding, even doubling it. This means that in January 2023 as well as investing $1,000 at $0.33 to buy 3,030 shares you would invest $14,000 (or $1,400 on the $100 monthly programme) to buy 42,424 shares.

You could stop there having stocked up on some super-cheap shares but you could also act on the other buy signals. This would mean investing an additional $10,000 at $0.78 in November to buy 12,280 shares. Finally, you would be on course to buy a further 7,000 shares at the closing price for June.

Using the first two additional purchases your total investment would have been $5,400 to have $16,390 for a return of 200pc or just over three times your total investment. Investing $1,000 each time would have made a profit of $110,000 for a commitment of $54,000 or a commitment of $27,000 if the funds committed were spread over time.

These. are fabulous returns albeit taxable because you cannot buy QQQ5 in a spread betting account. The positive is that if you hold your nerve the returns look predictable. All you need is that the Nasdaq 100 index always recovers after steep falls. Not only has it, or a similar index, ALWAYS recovered to new peaks in my lifetime but the story driving it higher is becoming stronger all the time.

A Big Dipper that Always Ends on a High

QQQ5 is a Big Dipper ride but rewarding if you stay the course. Using my buy more on buy signals approach you would also move into profit soon after the shares turned higher.

And there is a further point. You could use Coppock to double your monthly purchase rate while Coppock is negative and double your entire holding when Coppock turns up, becoming less negative. There are many games you could play but they have in common that they are all highly profitable.

The other common factor is that you must accept that you may have periods when your investment turns heavily negative, especially in the early days. Treat that as an opportunity.

Strategy – an Exciting Choice for Steel-Nerved Investors

Based on these results, I will try QQQ5. The results are amazing but testing, so probably not one for widows and orphans or those of a cautious disposition.

Share Recommendations

Leverage Shares 5x Long US Tech 100 ETP. QQQ5. Buy @ $1.4922 (but best if you plan on continuing with a $-cost averaging programme)

There is an issue with the commission if you invest £100 a month because IG’s minimum commission is £8 reduced to £3 for three trades in a month. I may buy more but trade quarterly – say £1,000 a quarter.

It is also tempting to try to work out a selling strategy. I don’t know if that would work. What we cannot see from the chart is what would have happened if QQQ5 had existed between 2012 and 2021, the period in which QQQ3 rose 90-fold. QQQ5’s performance would have been insane!

Your best bet might be to keep on accumulating knowing that in bear phases you will buy loads of cheap shares and in bull phases, your paper profits will be staggering. Maybe one day, if the profits are game-changing it might be wise to sell half your holding and keep rolling with the programme.

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