Leveraged ETFs limber up for another run higher

I said I would be returning to the subject of leveraged ETFs. Well, here goes. I think it is timely because US shares especially look poised to run higher. The global economy is slowly and painfully coming out of Covid which means the outlook is for stronger economic conditions which is good for growth. This should be a favourable background for shares. It may be a bumpy ride because of periodic alarms about inflation, interest rates, bond yields and all the other things investors find to worry about but that is what stock markets do. They climb a wall of worry. If your portfolio is built around strong companies or ETFs which are invested in strong companies you should do well.

The chart above of the Nasdaq 100 index since 1986 makes the case for investing in shares. It also makes the case for investing in leveraging ETFs which broadly speaking multiply that rise times three. You can quibble about things like the fact that leveraged ETFs are rebalanced daily and indices are typically rebalanced quarterly so performance may diverge. But the big picture is that whatever the index does leveraged ETFs do much more. If we are talking about a steadily rising index then leveraged ETFs must be an attractive option and certainly worth considering.

We can make the point more strongly by looking at actual performance. QQQ3, an ETF which roughly offers the performance of the Nasdaq 100 x three was launched at $100 a share in January 2013. Since then there has been a 30:1 share split so the adjusted opening price is $3.33333. Since the launch date QQQ3 is up 51.4 times based on a latest price of $171.30.

Over the same period the Nasdaq 100 is up 5.3 times. This is a major puzzle because it seems that the daily rebalancing of QQQ3 reinforces the outperformance. It should be up three times as much as the index because of the additional costs of daily rebalancing. In practice, it is up 51.4 times.

My cousin who is an excellent mathematician and a person I spoke to at IG suggested (a) that this might be something to do with the daily rebalancing and (b) that there could be a simple interest versus compounding effect taking place. I am still trying to find the answer and have emailed my query to Wisdomtree, who created the ETF.

Meanwhile I can’t help thinking that even if we don’t know exactly why QQQ3 and other leveraged ETFs can perform so well over the long run we can still exploit the phenomenon by buying their shares.

We are having great success with leveraged ETFs on QV for ETFs. My favourite leveraged ETF so far at least is QQQ3. It has been recommended 16 times since 2017 and the results are impressive. The average gain is 217.5pc. The first recommendation was on October 2017 and then 15 further recommendations at intervals ever since.

Next I looked at the unleveraged version, QQQ. This has been recommended 24 times in QV for ETFs with an average gain of 69.0pc. The ratio of QQQ3 to QQQ on these numbers is 3.152 which is more what you would expect.

Finally I looked at the gain in the Nasdaq 100 on its average level for the period. This is a rough and ready calculation but comes out at around 60pc. My QQQ alerts have done better than the index because some of them were made at low prices, exploiting the volatility of the index. QQQ3 has done 3.6 times better which is good but nothing like the 10 times better achieved if you had bought your entire QQQ3 holding on the day the fund was launched.

Whatever; I am ready to recommend for buying now all the leveraged ETFs in the portfolio giving buy signals.

QQQ3 Buy @ $171.29. Times recommended: 16. First recommended: $31.50. Last recommended: $138.5. Highest recommended: $139.50. Lowest recommended: $30.50

3USL. Buy @ $1400 Times recommended: 8. First recommended: $572.25. Last recommended: $877. Lowest recommended: $432

SOXL. Buy @ $40.69. Times recommended: 12. First recommended: $11.33 Last recommended: $41.25. Lowest recommended: $7.86. (This is the best performing ETF with an average gain on 12 recommendations of 227.333pc)

TECL. Buy @ $53.55. Times recommended: 4. First recommended: $22.2. Last recommended: $43.21

As always I only recommend shares, which are giving buy signals. The whole US stock market is looking exciting, especially technology shares, which is helping ETFs with a strong technology focus like QQQ3, SOXL (semiconductors) and TECL, which is a daily technology bull ETF, launched with exquisite timing at the bottom of the financial crisis in 2009. Since then it is up over 150-fold on the launch price. 3USL tracks the more sober S&P 500 index, which should be well placed as the world emerges from Covid-19.

My personal strategy with these ETFs is to invest small amounts at regular intervals into buy signals. I want to have an exciting ride while avoiding stress in line with my don’t care investing mantra.