ProShares Ultra QQQ (QLD +0.27%) is an exchange-traded fund (ETF) that tracks the Nasdaq-100 index. But unlike other Nasdaq-100 ETFs, which directly track the index, Ultra QQQ aims to double the performance of the Nasdaq-100.
If the Nasdaq-100 rises 1% in a day, the Ultra QQQ should advance 2%. But it also doubles its losses: If the Nasdaq-100 declines 1%, the Ultra QQQ should drop 2%. It tries to consistently double those gains and losses with a mix of swap agreements, options, and other derivatives.
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Over the past five years, the Nasdaq-100 has rallied 114% as Ultra QQQ's price surged 191%. While it hasn't exactly doubled the Nasdaq-100's return -- since it needs to be constantly rebalanced -- it still outperformed the index by a significant margin.
Is Ultra QQQ a good growth play for investors who can stomach the volatility? Let's review the three reasons to buy this ETF -- and the three reasons to avoid it -- to decide.
The three reasons to buy Ultra QQQ
Ultra QQQ might be worth buying for three reasons: The tech sector is booming, its derivatives strategy allows its investors to pursue riskier strategies with less capital, and it could be a useful tool for short-term traders who can stomach a lot of volatility.
The Nasdaq-100's biggest companies include Microsoft, Nvidia, Amazon, Apple, and Broadcom. These companies have plenty of exposure to the secular expansion of the cloud and artificial intelligence (AI) markets, and their stocks could continue to beat the market. If that happens, it might be smart to park your cash in an ETF that aims to double those returns.
If an investor wants to replicate Ultra QQQ's aggressive strategies on their own, they may need to deploy a lot more cash or take on margin loans to fund their own derivative trades. Simply buying the ETF puts those decisions in the hands of its fund managers -- and frees up investors' cash for other investments.
For short-term traders, Ultra QQQ could be a great way to amplify gains from temporary tailwinds, such as economic data, earnings reports, and other news-driven events.
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The three reasons to avoid Ultra QQQ
Ultra QQQ is a tough ETF to recommend for three reasons: Its dependence on swap contracts is risky, it magnifies losses, and it charges high fees.
Ultra QQQ tethers most of its assets to swap contracts. This means that it strikes agreements with banks and other parties to receive double the gain of the Nasdaq-100 on a regular basis. In return, it continues to pay fees and interest to those banks. But if a bank struggles or goes bankrupt, that swap contract could collapse and leave Ultra QQQ empty-handed. It mitigates that counterparty swap risk by diversifying its contracts, but it could face major losses in the event of another credit crunch or financial crisis.
The way it doubles the Nasdaq-100's losses also makes it a much riskier investment than other ETFs, such as the Invesco QQQ Trust (QQQ +0.14%), which simply tracks the Nasdaq-100. While it may be an attractive ETF for short-term traders seeking to magnify their gains, it could easily backfire and burn investors during a market downturn.
Lastly, the Ultra QQQ charges a gross expense ratio of 0.97% and a net expense ratio of 0.95%. In comparison, the Invesco QQQ Trust charges a total expense ratio (comparable to the gross expense ratio) of just 0.20%. Therefore, you're paying nearly five times the fees to try to double the Nasdaq-100's gains, but you're exposing yourself to double its downside potential.
Don't get too greedy with the Ultra QQQ
Warren Buffett famously told investors to be "fearful when others are greedy," and the Ultra QQQ ETF is a pretty greedy play. If you expect the Nasdaq-100 to keep rising and can stomach a lot of near-term volatility, this ETF might be worth nibbling on as a short-term trade. But if you're looking for a diversified, low-cost ETF to hold while sleeping soundly at night, the Ultra QQQ ETF isn't for you. Instead, you should either stick with a straightforward ETF, such as the Invesco QQQ Trust, or a less volatile one that tracks the S&P 500.
