SPXL vs. TQQQ: Which is Best?

SPXL vs TQQQ: Exchange-Traded Funds (ETFs) offer a fascinating opportunity to mix some of the biggest advantages of mutual funds with the most important benefits of standard equities. They operate much like mutual funds, in that a collection of investors pool their resources to buy a basket of assets. Each investor owns shares in the fund, and shares may increase or decrease in value as the market moves.

The collection of assets is typically designed to track an underlying index, such as the S&P 500. One measure of an ETF’s success is how successful it is in achieving that goal. ETF fans appreciate these funds, because they don’t require much active management. That results in substantially lower fees as compared to mutual funds.

The second big advantage that ETFs have over mutual funds is the fact that shares trade throughout the day. Mutual funds, on the other hand, only trade once per day after the market closes at 4pm. That may not be important in a relatively calm market, but in volatile times instant trades can mean stopping losses sooner.

Leveraged ETFs Primer

Many ETFs take a relatively simple approach to tracking the underlying index. They strive to match gains on a one to one basis. Leveraged ETFs are traded the same way as their standard peers, but they have more complex goals. Instead of attempting to mirror gains and losses of the underlying index, they seek to amplify gains by two or three times – occasionally more. This is achieved by investing in debt and financial derivatives. Such products are referred to as Leveraged ETFs.

The potential for enhanced gains is appealing to prospective investors, but it’s critical to remember that the possibility of greater rewards comes with greater risk. Leveraged ETFs work to multiply underlying index gains, but if the underlying index drops, the fund’s losses are doubled or tripled, as well. At best, this group of products is tricky, so it is best attempted by experienced investors.

What is SPXL?

Direxion Daily S&P 500 Bull 3X Shares (SPXL) is a Leveraged ETF with a stated goal of achieving daily results of 300 percent of the S&P 500 index. In other words, for every one percent increase in the S&P 500, this fund attempts to generate three percent returns. These figures are calculated before fees and expenses are considered.

SPXL is very clear in setting investors’ expectations. Its stated goal is intended to be measured in single-day increments. Fund managers note that these returns cannot be relied upon in any way for periods longer than a day.

Is SPXL a Good Investment?

Given current market conditions, Leveraged ETFs designed to double or triple underlying index returns are high-risk. The current volatility of the market and the substantial one-day drops seen in March 2020 make it hard for the fund to sell securities and/or obtain short exposure to securities. As a result, it is far more difficult to meet fund objectives.

Direxion has published a supplement to SPXL’s prospectus noting that due to the recent market disruptions caused by the COVID-19 pandemic, it is possible – and probable – that SPXL will not meet its investment goals for one or more single-day periods.

With that said, many of the drops were followed by substantial gains, so savvy investors who timed the market just right were able to profit. In considering whether an investment in SPXL is right for you, it essentially boils down to your level of risk tolerance, as well as your ability to recover from principal losses.

SPXL Expense Ratio

As previously mentioned, the expense ratios for ETFs tend to be quite low, averaging around 0.44 percent. As a Leveraged ETF, SPXL requires quite a bit more management, which is reflected in the expense ratio of 1.01 percent.

A Note about SPXS

As with many Leveraged ETFs, Direxion offers both a Bull and a Bear version of its S&P 500 3X Share Leveraged ETF. The Direxion Daily S&P 500 Bear 3X Shares (SPXS) has an equal but opposite goal as compared to SPXL. SPXS attempts to achieve (-300 percent) of the movement of the S&P 500.

What is TQQQ?

ProShares UltraPro QQQ (TQQQ) is one of the largest and most heavily traded Leveraged ETFs available today. As with SPXL, TQQQ attempts to triple the returns of its underlying index. However, instead of tracking the S&P 500 as SPXL does, TQQQ tracks the Nasdaq 100.

TQQQ ETF Pros

The biggest benefit of investing in TQQQ versus other Leveraged ETFs is that fund managers have been fairly successful in achieving stated goals since the product launched. Since inception in 2010, TQQQ’s market price total return is 49.12 percent as compared to the Nasdaq 100’s 18.97 percent. The five-year annualized return is 39.80 percent versus 16.90 percent, and the one-year return is 133.83 percent versus 39.46 percent. All figures are calculated as of 12/31/2019.

TQQQ Cons

The biggest downside to TQQQ is the impact of sudden market drops, such as those that occurred in March of 2020. Because all losses are amplified by 300 percent, a single-day loss can quickly wipe out your entire investment.

TQQQ Expense Ratio

As a Leveraged ETF, TQQQ’s expense ratio is somewhat higher than its standard ETF peers.  The gross expense ratio stands at 0.98 percent, and the net expense ratio is 0.95 percent.

SPXL vs. TQQQ

In comparing SPXL and TQQQ, the ability of fund managers to meet stated objectives is key. However, it is also important to consider the differences inherent in betting on the S&P 500 versus the Nasdaq 100.

The Nasdaq 100 is heavily focused on high-performance industries, including Consumer Services, Health Care, and most importantly, Technology. In fact, the technology industry makes up 57 percent of Nasdaq 100 companies, as compared to just 23 percent of the S&P 500.

Because Nasdaq 100 companies are seeing substantial growth, this index has outperformed the S&P 500 ten out of twelve years in the period from 2008 to 2019. During that period, the Nasdaq 100 returned a cumulative total of 321 percent (13 percent annualized) to the S&P 500’s 161 percent returns (8.5 percent annualized).

Despite the differences in industry weighting, the two have historically seen similar patterns of volatility, which is somewhat surprising. From 2008 to 2019, the Nasdaq 100’s annualized volatility was 22 percent – just a bit higher than the S&P 500’s 20 percent. For investors, that makes TQQQ a better choice. When the Leveraged ETF successfully achieves its goals, the Nasdaq 100’s higher returns are amplified by 300 percent.

However, as mentioned, Leveraged ETFs carry high risk, and they are not intended as a long-term investment. Those new to investing may wish to consider alternative options, and experienced traders should consider holding shares for very short periods, re-evaluating daily.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.