A lot has been written suggesting that “buy the dip” is dead.
After months of declines, including a 20% drop in the S&P 500, a 30% drop in the Nasdaq and a 65% drop in bitcoin, investors have given up on a quick snapback in markets. If you pull up a chart of just about any of the former highfliers—in stocks, exchange-traded funds or cryptocurrencies—you’ll see them wallowing near their lows.
Still, declaring the investing strategy dead may not be sound. That’s because in at least one area, dip buying hasn’t gone away. The ProShares UltraPro QQQ (TQQQ) is No. 9 on this year’s top inflows list. The triple-leveraged Nasdaq fund picked up $10.9 billion of new money so far in 2022, even as prices for the ETFs have tumbled 74%.
Sure, a lot of those inflows came earlier in the year, when there was still hope that the markets would turn around quickly. But close to $3 billion of those inflows came during the past three months, as tech stocks have fallen further out of favor.
Not 3x Over Longer Periods
As a triple-leveraged ETF, TQQQ packs a major punch at times when the tech-heavy Nasdaq-100 is rallying. From the COVID-19 lows in 2020 to the end of 2021, the ETF’s price increased nearly nine-fold.
It hasn’t quite given up all of those gains, but now it’s “only” a double from that low point. By comparison, the unleveraged Invesco QQQ Trust (QQQ) is up 68%.
This is a great illustration of the fact that over time periods longer than a day, the “3x” multiplier doesn’t necessarily hold. That’s because of the math behind daily rebalancing. Fortunately for anyone who bought TQQQ before 2021, the ETF went up so much that even with this year’s pullback, they’re still in the green.
The same can’t be said for those who bought in 2021 or the first half of 2022.
Meanwhile, anyone who bought this month or last is probably happy with their purchase price, at least for now. Any buys in that time frame have been close to this year’s lows for the ETF.
But ultimately, how good those purchases end up being depends on whether the Nasdaq has already bottomed out or takes another leg lower. That’s an obvious statement, but it’s a critical for holders of TQQQ.
Unlike investors in unleveraged ETFs who can wait out any declines in their investments, leveraged ETFs like TQQQ are “path dependent.” A big decline might cripple the fund, making it hard to recover, even when the Nasdaq eventually comes back.
That’s why products like these are considered trading tools that are appropriate for those with a high tolerance for risk.