What is the difference between shorting SPY directly and buying shares in SQQQ?

by chozanwan

SQQQ tracks the inverse of the NASDAQ-100, not the S&P 500. But I’ll answer the question as if you’re comparing SQQQ vs shorting QQQ (the ETF that tracks the NASDAQ).

SQQQ being triple leveraged means a 1% drop in the NASDAQ-100 is a 3% gain in SQQQ. So if the NASDAQ tanks in a day, you’ll theoretically make triple on SQQQ vs shorting QQQ.

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However leveraged ETFs suffer from something called decay which makes holding SQQQ for even a period of time longer than a day very risky. Volatility destroys the performance of leveraged ETFs.

Say for example on Day 1, the NASDAQ is down 10%. Then on Day 2, the NASDAQ goes up 11.1%. Then you’re back to where you’ve started: e.g. (1 – 0.10) * (1 + 0.111) =~ 1

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Let’s look at how SQQQ performs. Day 1, SQQQ is up 30% (the triple inverse of the NASDAQ on Day 1). Then on Day 2, SQQQ gives up 33.3%. Are we back where we started? Nope. (1 + 0.3) * (1 – 0.333) = 0.8671. Ouch!

 

 

Disclaimer: Consult your financial professional before making any investment decision.

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