Now Consider TQQQ

The next logical step after considering the QQQ is to look at the ProShares UltraPro QQQ (TQQQ), that is the 3X leveraged Nasdaq 100 exchange traded fund. Leveraged ETFs get bad press because they supposedly carry hidden risks for small, unsophisticated investors. Brokers charge higher margin requirements for leveraged ETFs, especially 3X ETFs ,which are advertised to deliver three times the daily return of their underlying index-3X up OR down!

Here I will compare the TQQQ to its underlying fund, the QQQ. Two caveats: leveraged funds have higher fees and leveraged funds are marketed only as short term investments, that is, the 3X returns apply only to daily moves in the underlying, not for moves longer than one day.

Do the higher fees embedded in the TQQQ erase their supposed excess returns over the plain vanilla QQQ fund? And, what ARE the long term effects of TQQQ? Yahoo data for TQQQ begins 2/11/2010. Here are the results.

The below are continuously compounded rates of return.

Annualized Returns
as of 11/29/2017
	TQQQ	QQQ
1 month	107.8%	17.9%
3 month	90.2%	-30.4%
6 month	55.9%	-10.0%
1 year	81.9%	14.0%
3 year	32.7%	8.8%
5 year	47.3%	15.4%
Since TQQQ Inception	27.3%	9.8%

* 2010 return is for the period 2/11/2010 to 12/31/2010.
* 2017 return is for the period 1/01/2017 to 11/29/2017.

Risk and Return

	TQQQ	QQQ
3 year mean	32.7%	8.8%
3 year standard deviation	28.8%	8.9%
5 year mean	47.3%	15.4%
5 year standard deviation	30.5%	9.6%

Conclusion

WOW. TQQQ returns are enormous. The 3 and 5 year returns do deliver 3 times the QQQ. The risk is enormous too-in the 28 to 30% range.  The risk adjusted returns, that is, the return delivered per unit of risk is comparable for both funds but the 5 year QQQ return per unit of risk exceeds that of the TQQQ.

The question for most in investors is risk. 9%-10% risk looks reasonable and is found in the QQQs. 29% to 30% found in the TQQQs may be too much to stomach for most investors.

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

QQQ versus SPY

Fairness in Indexing

With all the research and talk about the superiority of indexing over active management, a major issue not yet addressed here is which index has the highest performance? Every index is just a portfolio. Indexes vary by their portfolio selection criteria. The S&P is based upon a sector neutral market capitalization criteria, size. The Nasdaq 100 although is based, in-effect, upon a technology sector specific criteria. The Nasdaq picks winners, the tech sector, which is a basic violation of modern portfolio theory (MPT).

As we approach 2017 year-end, the outperformance of the Nasdaq 100 Index over the S&P 500 just gets larger and larger. It's only fair to review the long-term performance of the Nasdaq and compare this to the S&P. The relevant symbols here are the SPDR S&P 500 ETF (SPY) and the PowerShares QQQ ETF (QQQ). Of course, there are other similar ETFs but SPY and QQQ are the largest, most active of the lot.

Results

Yahoo data for the QQQ starts on 3/10/1999 and our results begin with this date to the present (11/27/2017).

The below are all continuously compounded rates of return.

Annualized Returns
as of 11/27/2017

	SPY	QQQ
1 month	11.7%	38.6%
3 month	26.8%	243.3%
6 month	21.4%	139.6%
1 year	18.6%	79.6%
3 year	9.6%	31.0%
5 year	14.2%	28.8%
10 year	7.8%	17.2%
15 year	8.8%	15.6%
Since QQQ Inception	5.6%	9.3%

Risk and Reward

	SPY	QQQ
3 year mean	8.7%	12.3%
3 year standard deviation	5.2%	7.6%
5 year mean	14.9%	17.4%
5 year standard deviation	8.9%	8.9%
10 year mean	6.8%	10.9%
10 year standard deviation	19.4%	23.9%

Conclusion

QQQ indeed sharply outperforms the SPY even after the disasterous three year tech collapse at the inception of the fund. As for risk, the QQQ is generally higher risk, but only the most recent 3 year period has a higher risk adjusted return for the SPY.

In spite of these results, the question for investors remains: how period dependent is the QQQ outperformance?  The recovery after the 2009 recession was a good long-term test and QQQ sharply outperformed once again.

Does this mean investors should abandon the SPY for the QQQ? In theory, no, because the QQQ implicitly means picking winners and MPT is cautionary against that approach. In practice, the nature and ubiquity of tech may offset the negatives of stock picking, and the results are a powerful testament.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Vanguard versus Vanguard: VFIAX versus VOO

My prior post comparing Vanguard's S&P 500 fund to their ETF did not address a simple head-to-head comparison USING VANGUARD's OWN DATA. It also did not compare the VFIAX Admiral fund to the VOO which invests in the Admiral fund, or at least has the same 0.04% expense ratio.

Well here are the results:

VFIAX (NAV)
as of 9/30/2017

Returns
Quarter-end   4.48%
Year-to-date  14.20%

Average Annual Returns
1 year    18.57%
3 year    10.78%
5 year    14.18%
10 year    7.43%

Risk and volatility

Standard deviation
3 year     10.07%
5 year      9.55%
10 year   15.14%

VOO (Market Price)
as of 9/30/2017

Returns
Quarter-end   4.46%
Year-to-date  14.11%

Average Annual Returns
1 year    18.59%
3 year    10.75%
5 year    14.18%
10 year    -

Risk and volatility

Standard deviation
3 year     10.07%
5 year      9.55%
10 year   15.14%

The results are virtually the same. Which is a triumph of ETF minimal tracking error.

Investors can receive ETF benefits of custody (keeping your money at one broker, if you want-a questionable benefit at best) and market hours trading (also questionable especially with index funds) without giving up return.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Morningstar Falling

The recent story in the Wall Street Journal,

The Morningstar Mirage

Investors everywhere think a 5-star rating from Morningstar means a mutual fund will be a top performer—it doesn’t ,

has created a stir in the mutual fund business and in Morningstar itself which issued forceful rebuttals: 

There’s No Morningstar Mirage - We Illuminate Investing‎

The Wall Street Journal’s Statistical Fog

Setting the Record Straight on Our Fund Ratings

In addition to claim and counterclaim there have been reviews from the peanut gallery:

Morningstar Versus The Wall Street Journal: Who Won?

WSJ vs Morningstar

The upshot of all this back and forth, including the numerous studies cited in the "Who Won?" story, is that Morningstar, as expected, offers very little benefit to investors.

In my opinion, the 5-star ratings serve the interests of the fund companies that pay for them. The extensive list of categories don't really exist except to create a grouping where a fund manager can claim higher ratings.

The details of this exercise leave us with the outcome we expected: the only useful result from investment theory for individual investors is that index funds outperform. Again, our quest comes up short.