QLD Is the Nasdaq-Tracking QQQ on Steroids

ProShares Ultra QQQ (QLD) is a turbocharged version of the Invesco QQQ Trust (QQQ), an exchange-traded fund that reflects the price action of the Nasdaq Composite. 

In the first nine months of this year, the tech-heavy Nasdaq rose over 26% to 13,219.32, although it has slipped a bit since the end of September.

Still, the technology index has delivered over double the percentage return of the S&P 500 this year. It has also far exceeded the performance of the Dow Jones Industrial Average and small-cap iShares Russell 2000 ETF (IWM). Technology has been the place to be, and if that trend continues, QLD offers tech bulls a product that is the QQQ on steroids. 

The technology sector is more volatile than other leading stock market sectors. The monthly historical volatility of the Nasdaq Composite in late October is at 20.9%. The price variance measure of the S&P 500 is 17.3%, and the DJIA’s historical volatility measure is 18.5%. Only the highly volatile IWM small-cap index displays a higher price variance at 22.4%. 

Why Tech Should Still Rally 

The following are reasons that tech stocks should continue to rally for the rest of this year: 

• According to Dan Ives, managing director at Wedbush Securities, third-quarter corporate earnings reports will likely to have showed “transformational AI (artificial-intelligence) growth” and a “stabilizing IT spending environment.” 
• While the aggressive Federal Reserve remains committed to a hawkish monetary policy path, the trajectory of interest rate hikes has slowed in 2023. After rising from zero percent in March 2022 to the current range of 5.25% to 5.50%, the fed-funds rate may increase only 25 basis points over the coming months. Meanwhile, the geopolitical landscape and carnage in the U.S. bond market could cause the Fed to pause in the current environment.
• The trend in any market is always your best friend. The trend in the technology-heavy Nasdaq remains higher in October.

Source: Barchart

The chart shows the Nasdaq’s bullish trend of higher lows and higher highs over the past 20 years. QQQ tracks the Nasdaq Composite.

Source: etf.com

The chart dating back to the turn of this century highlights QQQ’s bullish trend.

QLD a Highly Liquid Product 

QLD magnified the QQQ’s price action. At $61.73 per share on Oct. 20, QLD had nearly $4.9 billion in assets under management. QLD trades an average of more than 4.5 million shares daily and charges a 0.95% management fee.

The most recent rally in QQQ took it 6.4% higher from $351.36 on Sept. 27 to $373.74 on Oct. 12.

Source: etf.com

Fund Flows 

The etf.com Fund Flows Tool highlights the significant asset increase as funds flowed into QLD since the end of 2022.

Source: etf.com

The chart illustrates that about $488 million has flowed into QLD since Dec. 29, 2022. The flow of funds reflects bullish investor sentiment in the technology sector.

Price of Leverage 

QLD is a leveraged tool. Therefore, it creates gearing from options and swaps on QQQ. Leverage comes at the price of "time decay." QLD will lose value if QQQ doesn’t move higher or remains stable. The price for a leveraged upside return is losses if the bullish trend in technology stocks turns lower or the sector stabilizes and consolidates.

QLD Is a Trading Tool 

Leverage benefits market participants who take advantage of significant market trends. However, it is a curse when markets move in an unanticipated direction. Therefore, QLD and other leveraged derivative products are appropriate only for short-term risk positions, not long-term investments. 

Trading with QLD requires a risk-reward plan to protect capital, including time and price stops. Moreover, risk positions require careful attention to current market prices rather than original execution price levels.

When QQQ rallies, adjusting the risk-reward dynamics to reflect the current market price is appropriate. Raising profit horizons and stop levels can maximize profitability and limit capital.

Bottom Line

However, when QQQ declines, it is critical to stick to stop levels, as QLD will lose value much faster than the underlying QQQ.  

QLD is QQQ on steroids, but it is crucial to realize that the turbocharged product involves commensurate risks.