TQQQ vs. TVIX: How Traders Are Playing Triple-Leveraged Funds

Traders have been incinerating capital in TVIX and SQQQ this year, even as the tech sector has outperformed

by Bernie Schaeffer

Published on Aug 6, 2019 at 8:12 AM
Updated on Aug 6, 2019 at 8:12 AM

In case you neglected to tune into the second half of last week's trading, suffice it to say that investors were extremely skittish in the wake of Fed Chair Jerome Powell's post-interest rate cut remarks. After the top central banker described the much-anticipated easing move as a "midcycle adjustment," those market participants who had already flooded into the "full-tilt dovish" camp were forced to readjust their worldviews back toward the centrist arc of the bell curve -- and following that "dark night of the soul" for Wall Street doves, it took only a few rapid-fire Trump tweets and a mixed July jobs report to send investors wringing their hands into the weekend. After a prolonged slumber, in fact, the Cboe Volatility Index (VIX) ended the week with its biggest percentage jump since March 2018.

When the stock market catches a jolt like this one, it can be both alarming and unnerving for investors -- but, as ever, the wisest course of action is rarely to follow in the footsteps of the panicking hordes. Instead, now seems like an ideal time, in the wake of that late-week pullback in equities, for another of our deep dives into exchange-traded fund (ETF) flows, with an eye toward putting the post-Fed volatility pop in its proper context.

Specifically, by comparing the coincident fund flows on a group of four ETFs -- three that are close relatives of one another, and a fourth that's highly relevant to our purposes, if not specifically "related" to the others -- we'll get a "quick and dirty" read on where investors are putting their money, and what it says about their appetite for risk.

Our three related ETFs all have the tech-centric Nasdaq-100 Index (NDX) as their benchmark (bearing in mind tech's reputation as a high-growth, risk-friendly area of the equities market). First up is the straightforward Invesco QQQ Trust (NASDAQ:QQQ), which is essentially a tradable version of NDX. Through July 31, QQQ boasted an impressive year-to-date gain of 26.1% on the charts, but had garnered net inflows of only $378.67 million for the period -- a drop in the bucket, relative to its $76.82 billion in assets under management (AUM).

And then there's the ProShares UltraPro QQQ (NASDAQ:TQQQ) triple-leveraged ETF, which aims to deliver three times the daily average returns of the NDX -- making this a "super bullish" tech play. Unsurprisingly, given the strong QQQ share price gains in 2019, the triple-leveraged TQQQ was up nearly 85% on a year-to-date basis through the end of July... and yet, despite a respectable AUM footprint of $3.84 billion, this high-flying ETF actually registered net outflows in excess of $1.73 billion during the first seven months of the year -- a period of time during which its net asset value (NAV) rose 77.41%, per etf.com!

By comparison, the ProShares UltraPro Short QQQ (NASDAQ:SQQQ) -- an inverse triple-leveraged NDX play for the supremely bearish, which aims to return three times the opposite of the tech index's daily performance -- has raked in net inflows topping $1.04 billion for the calendar year-to-date so far. That's all the more impressive when you consider that SQQQ, after having shed more than 50% of its NAV since the start of 2019, sports an AUM just shy of the $1 billion mark, at $980.65 million.

So, to sum up -- investors have been lukewarm on the outperforming tech ETF QQQ, they've been stone-cold on the triple-bullish tech fund TQQQ; and they've been incinerating capital by the fistful on triple-bearish tech fund SQQQ. But hey, how do they like the odds for volatility?

Last week's jolt aside, it's been a tame year for VIX, which remains down about 30% since the beginning of 2019. Against this backdrop, the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ:TVIX) -- which is designed to provide double-leveraged exposure to one-month VIX futures -- was down nearly 81% year-to-date through July 31, thanks to its ability to magnify its underlying index's daily losses over time. Nevertheless, investors had plowed year-to-date net inflows of $1.31 billion into TVIX by the time the dust settled on the Fed-day session... which, similar to underperforming SQQQ, actually outweighs TVIX's current AUM of $913.20 million.

We've recently discussed the massive inflows into the various competing S&P 500 derivative ETFs, so this quick assessment isn't meant to show that traders are across-the-board "scared of stocks," by any means. Instead, what we're seeing is investors pouring cash into so-called "low volatility" equity ETFs, while triple-leveraged tech funds (with year-to-date performance approaching a double) are tossed overboard -- even as triple-levered volatility funds (complete with "black-hole" performance) are being scooped up rather enthusiastically.

We'd call that further evidence of a sentiment backdrop that is, in many respects, bearish in the extreme for a stock market that has so recently been tagging new highs. As long as key support levels remain in place for equity benchmarks, the complete lack of euphoria displayed by the investors favoring TVIX and its wipeout-grade returns over TQQQ and its S&P-crushing rally should continue to provide an edge for contrarian bulls.

tqqq vs tvix chart


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