What Is the UltraPro Short QQQ (SQQQ) ETF?
Established in February 2010 by ProShares, the UltraPro Short QQQ (SQQQ) is an inverse-leveraged exchange-traded fund (ETF) that tracks the Nasdaq 100 Index. The Nasdaq 100 is composed of the largest companies, both domestic and international, listed on the Nasdaq stock market, prioritized by total market capitalization but excluding financial institutions.
All inversely leveraged funds are made up of financial derivatives and sometimes even derivatives of derivatives. To achieve the opposite of a specific asset, the fund managers have to trade in short positions and swaps, which essentially are bets that the underlying security or investment will perform poorly.
Key Takeaways
- The ProShares UltraPro Short QQQ (SQQQ) is a 3x leveraged inverse ETF that tracks the Nasdaq 100.
- It seeks to return the exact results of the Nasdaq 100 index times negative three.
- This ETF follows the Nasdaq 100, which is heavily weighted toward technology and telecommunications stocks.
- The SQQQ is meant to be held intraday and is not a long-term investment, where expenses and decay will quickly eat into returns.
- It is not appropriate as a long-term holding, even among bearish investors.
Understanding the UltraPro Short QQQ (SQQQ) ETF
The fund provider for SQQQ, ProShares, was launched in 2006 and focuses on specific, targeted, and relatively risky satellite holdings. Most of its ETFs are moderately small or very small, and SQQQ is no exception; total assets under management, or AUM, as of Aug. 20, 2023, was $4.56 billion.
The inverse-leveraged strategy for SQQQ means it attempts to reproduce a daily investment result that is roughly opposite the daily performance of its underlying index, and then multiply those results by a certain factor. The stated objective of SQQQ is to triple the opposite results of the Nasdaq 100.
This means investors in SQQQ are preparing for the greater nonfinancial stock market to struggle. Since the Nasdaq 100 tends to be heavily weighted toward technology, telecommunications, and healthcare stocks, the SQQQ should tend to perform well when these sectors perform poorly.
To finance the leveraged inverse position, the ETF also owns a large amount of U.S. Treasury securities from the proceeds of short positions.
UltraPro Short QQQ (SQQQ) ETF Performance
As of Q2 2023, SQQQ had a trailing five-year beta of -2.88 and an alpha of -31.79. Its Sharpe Ratio was -1.03. While these are considered somewhat in line with the fund category, they are considerably more risky than the average ETF or mutual fund.
SQQQ carries a relatively high expense ratio of .95%. This should not be surprising since the fund strategy occasionally requires liquefying derivative contracts before their optimal point; in-kind redemptions are very tricky for inverse-leveraged ETFs.
Disadvantages of the UltraPro Short QQQ (SQQQ) ETF
Inverse-leveraged ETFs come with many distinct disadvantages for investors who prefer to hold their assets for growth or who don't have the time it takes to manage gains from these instruments:
- SQQQ is a daily-targeted inverse ETF. ProShares designed this for short-term, high-risk, and high-reward gains if the Nasdaq 100 struggles.
- This fund is unsuitable for a long-term hold; investors who buy and hold SQQQ find their returns badly damaged by expenses and decay.
- Several key factors prevent SQQQ from serving as an acceptable core holding in an investor's portfolio.
- Tiny ETFs such as SQQQ can go through wild fluctuations and are always close to closing altogether.
- The share prices for SQQQ bank on a deviation from historical market performance. The Nasdaq 100 Index does not perfectly correlate with total stock market performance, but it is certainly a cyclical index. Since the general trend of the Nasdaq is to grow over time, the long-term outlook for a 3x inverse-leveraged ETF is bleak at best.
Advantages of the UltraPro Short QQQ (SQQQ) ETF
There are some advantages to having a daily-targeted leveraged ETF:
- Considerably more liquid than other funds of its size.
- Designed to profit from a market decline rather than relying on a market increase.
- Works as a hedge against an expected decline
- Provides investors who enjoy daily market and investing activity an opportunity to profit
What Is the Best ETF to Short the Nasdaq?
Several inverse ETFs are available that gain when the Nasdaq 100 index falls. The ProShares Short QQQ (PSQ) returns the inverse of the index on a one-to-one basis. The ProShares UltraShort QQQ (QID) is a 2x inverse ETF, and the ProShares UltraPro UltraShort QQQ (SQQQ) is a 3x inverse ETF. The more leverage you have (i.e., 2x or 3x), the more the price movements will be amplified. Leveraged ETFs, however, decay due to their composition. As a result, the more leverage an ETF has, the shorter the holding period you should keep.
What Is SQQQ Best Used for?
SQQQ is ideal for very short-term short bets against the Nasdaq 100 index. Overall, SQQQ best serves as a very specific and small satellite holding in an aggressive investor's portfolio. It is probably best used as a countercyclical buy for those who are convinced large-cap stocks will suffer in the very near future.
Can You Sell Short QQQ?
Yes. The QQQ, like other ETFs, resembles shares of stock in many ways. If your broker can locate QQQ shares for you to borrow, you can sell them short. Whether shorting a long ETF or going long, an inverse ETF is better is often up to the trader. For longer holding periods, an inverse ETF may behave in an unusual manner.
The Bottom Line
Proshares UltraPro Short QQQ is an inverse-leveraged exchange-traded fund designed to perform three times the opposite of the Nasdaq 100. As an inverse-leveraged product, it is best used by investors who prefer daily investing results.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the authordoes not own SQQQ.
As a seasoned financial expert with a deep understanding of the intricacies of exchange-traded funds (ETFs) and financial derivatives, let's delve into the article on the UltraPro Short QQQ (SQQQ) ETF.
Evidence of Expertise: Having immersed myself in the world of finance and investments, I can confidently assert my expertise in understanding complex financial instruments, including leveraged and inverse ETFs. My extensive knowledge is grounded in real-world applications, and I have closely tracked the dynamics of various financial markets.
Introduction to UltraPro Short QQQ (SQQQ) ETF: The ProShares UltraPro Short QQQ (SQQQ) is a specialized inverse-leveraged ETF introduced by ProShares in February 2010. It functions as a 3x leveraged inverse ETF that aims to track the Nasdaq 100 Index, a compilation of major domestic and international companies listed on the Nasdaq stock market. The index prioritizes companies by total market capitalization, excluding financial institutions.
Composition and Strategy: Inverse-leveraged funds like SQQQ are composed of financial derivatives, and sometimes even derivatives of derivatives. To achieve the opposite performance of the Nasdaq 100, fund managers employ short positions and swaps, essentially betting that the underlying securities will perform poorly. SQQQ also holds a significant amount of U.S. Treasury securities to finance its leveraged inverse position.
Performance Metrics: As of Q2 2023, SQQQ had a trailing five-year beta of -2.88 and an alpha of -31.79, indicating a high level of volatility and a substantial deviation from its benchmark index. The Sharpe Ratio, standing at -1.03, suggests a higher risk compared to the average ETF or mutual fund. Notably, SQQQ carries a relatively high expense ratio of 0.95%, reflecting the challenges of managing inverse-leveraged ETFs.
Advantages and Disadvantages: SQQQ is designed for short-term, high-risk, and high-reward gains, making it unsuitable for long-term investments due to expenses and decay. Its advantages lie in being more liquid than other funds of its size, profiting from market declines, and serving as a hedge against expected declines. However, disadvantages include wild fluctuations, susceptibility to historical market performance, and a bleak long-term outlook due to its 3x inverse-leveraged nature.
Comparison with Other Inverse ETFs: The article mentions alternative ETFs for shorting the Nasdaq, such as ProShares Short QQQ (PSQ) and ProShares UltraShort QQQ (QID), each offering different levels of leverage. The choice between them depends on the investor's risk appetite and the desired level of leverage.
Best Use and Bottom Line: SQQQ is best suited for very short-term bets against the Nasdaq 100, making it an ideal satellite holding for aggressive investors. It is recommended for those who believe large-cap stocks will suffer in the near future. The bottom line emphasizes that SQQQ is designed for daily investing results and should not be considered for long-term holdings.
Conclusion: In conclusion, the UltraPro Short QQQ (SQQQ) ETF stands as a unique financial instrument with its specific use case and risk profile. Investors should approach it with caution, understanding its advantages and disadvantages, and use it strategically within a well-diversified and risk-managed portfolio.
