What is TQQQ? Definition & How to Use It

Investing
Updated: 11th Oct 2021
Written by Sean Graytok
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What is TQQQ? Definition & How to Use It
Investing
October 11, 2021
Written by Sean Graytok

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Looking to trade tech stocks with leverage? TQQQ might be your best option.

Here’s everything you need to know about TQQQ and how to use it.

What is TQQQ?

The ProShares UltraPro QQQ (TQQQ) seeks a 3x return of the Nasdaq 100 Index for a single day.

TQQQ is among the more actively traded leveraged ETFs given its high liquidity and the popularity of the underlying index it follows.

The underlying Nasdaq 100 Index is a basket of the most actively traded companies listed on the Nasdaq stock exchange, excluding financial stocks.

A significant portion of the index consists of technology stocks, specifically FAAMG, which make up over 40% of the index.

TQQQ uses financial derivatives and debt to move three times more than this target index for one trading day.

Essentially, whatever the Invesco QQQ ETF does over the day, TQQQ will do three times as much — hence, its nickname “triple Qs.”

How to Use TQQQ

TQQQ is meant for active traders seeking magnified gains within a single day of trading.

Traders use TQQQ to get target level exposure for less cash and be overweight a market segment without coughing up additional cash.

Due to the compounding and daily rebalancing of TQQQ on behalf of its provider, holding periods of greater than one day can result in significantly different returns from the target return.

Therefore, it’s best to use TQQQ when you’re bullish on the daily returns of the tech-heavy Nasdaq 100 Index. However, you must be willing to accept magnified losses, too.

The 3x leverage with TQQQ works very efficiently to the downside as well.

>> More: What are the Best Stocks to Buy?

Advantages of TQQQ

TQQQ is a highly liquid trading vehicle with large amounts of open interest or the total number of net outstanding options contracts.

This level of trading activity suggests you’ll experience minimal slippage when trading TQQQ.

In fact, TQQQ’s average spread over the last 45 days has been around $0.01, which is the dollar amount between the highest and lowest posted price of the ETF.

There’s a high probability your TQQQ market orders get filled at the price you want.

Disadvantages of TQQQ

The aforementioned liquidity does come at a cost — ProShares charges a 0.95% expense ratio on TQQQ.

However, we believe traders should prioritize order execution times over a few basis points on expense ratios.

But it’s all relative. The convenience of using TQQQ, compared to trading QQQ with margin from a broker, will ultimately be up to the individual.

Another disadvantage of TQQQ is that you can lose all of your money pretty fast.

While this is true with any investment, using leverage can vaporize a portfolio regardless of a person’s experience level.

TQQQ Fund Details

Here’s a quick snapshot of TQQQ’s details:

  • Inception Date: 2/9/2010
  • Exchange: Nasdaq
  • Assets Under Management (AUM): $15.9 billion
  • Net Expense Ratio: 0.95%
  • Number of Holdings: 102

While the mega-cap tech stocks primarily drive TQQQ’s underlying index, other sectors can influence the performance too. Here is a breakdown of the sectors that comprise TQQQ:

  • Information Technology: 49%
  • Communication Services: 20%
  • Consumer Discretionary: 17%
  • Health Care: 7%
  • Consumer Staples: 5%
  • Industrials 2%
  • Utilities: 1%

The term ‘tech stock’ is becoming trivial — all of these companies clearly use technology in some way.

For example, Amazon isn’t included in TQQQ’s “Technology” allocation, but it has arguably leveraged technology better than any company in history.

TQQQ Top Holdings

Speaking of those tech companies, here are TQQQ’s top holdings:

#1. Apple (AAPL) 11.0%

#2. Microsoft (MSFT) 9.82%

#3. Amazon.com (AMZN) 8.35%

#4. Facebook (FB) 7.91%

#5. Alphabet (GOOG) 7.40%

#6. Tesla (TSLA) 3.90%

#7. NVIDIA (NVDA) 3.65%

#8. PayPal (PYPL) 2.51%

#9. Adobe (ADBE) 2.05%

#10. Netflix (NFLX) 2.00%

The average price to earnings of TQQQ companies is 38.05, and their average market cap is $188 billion.

Considering they both follow the same index, TQQQ will have the same holdings and allocations as QQQ.

>> More: Join The Motley Fool Stock Advisor & see their top 10 stocks to buy right now.

TQQQ: Frequently Asked Questions

Can you hold TQQQ long term?

You can hold TQQQ long term, but it’s probably not a good idea. The ETF is rebalanced daily to maintain its leverage ratio with its underlying index, resulting in unpredictable compounding if you hold the fund for more than a couple of days or even a single day.

What are TQQQ fees?

TQQQ fees include a net expense ratio of 0.95%, which is the industry standard for 3x leveraged ETFs. TQQQ has a higher expense ratio relative to the average fund because it offers leverage and requires more work on behalf of the provider.

What is included in TQQQ?

TQQQ includes three times leverage on the top 100 companies listed on the Nasdaq. It consists of the best FAAMG stocks, which make up a significant portion of the fund.

Is TQQQ a good fund?

TQQQ is a good fund if you’re seeking to trade growth stocks, with leverage, for a single day. TQQQ is not a good fund for long-term investors because it’s designed for day trading the Nasdaq’s volatility.

Bottom Line: TQQQ Definition

TQQQ is very good at doing what it’s designed to do, but it can wreck your portfolio if you use it the wrong way.

Keep Reading:

This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok
Sean is a student of the financial and technology industry. He is interested in the people and companies who are driving the innovation that will change our future.