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.
I am a seasoned financial analyst with extensive expertise in exchange-traded funds (ETFs) and financial derivatives. My knowledge is grounded in years of hands-on experience and a deep understanding of market dynamics. I've closely followed the evolution of various ETFs, including leveraged and inverse products like the UltraPro Short QQQ (SQQQ) ETF.
Now, let's delve into the concepts mentioned in the article about the UltraPro Short QQQ (SQQQ) ETF:
1. UltraPro Short QQQ (SQQQ) Overview:
- Established by ProShares in February 2010.
- Inverse-leveraged ETF tracking the Nasdaq 100 Index.
- Composed of major companies listed on the Nasdaq, prioritized by market capitalization excluding financial institutions.
- Utilizes financial derivatives, including short positions and swaps, to achieve the opposite of the Nasdaq 100's performance.
2. Fund Provider - ProShares:
- ProShares, launched in 2006, specializes in targeted and relatively risky satellite holdings.
- Most ETFs are moderately or very small in size.
- SQQQ had total assets under management (AUM) of $4.56 billion as of August 20, 2023.
3. Investment Strategy:
- Inverse-leveraged strategy aiming to triple the opposite results of the Nasdaq 100.
- Heavy weighting toward technology, telecommunications, and healthcare stocks in Nasdaq 100.
- Fund relies on short positions and owns U.S. Treasury securities for leveraged inverse positions.
4. Performance Metrics (As of Q2 2023):
- Trailing five-year beta: -2.88
- Alpha: -31.79
- Sharpe Ratio: -1.03
- Expense ratio: 0.95%
5. Disadvantages of SQQQ:
- Unsuitable for long-term holding due to daily targeting and high-risk nature.
- Expenses and decay can erode returns for buy-and-hold investors.
- Wild fluctuations and susceptibility to closure.
6. Advantages of SQQQ:
- More liquid than other funds of its size.
- Designed to profit from market declines.
- Acts as a hedge against expected declines.
- Appeals to investors interested in daily market activity.
7. Comparison with Other Inverse ETFs:
- ProShares Short QQQ (PSQ) is a 1x inverse ETF.
- ProShares UltraShort QQQ (QID) is a 2x inverse ETF.
- ProShares UltraPro UltraShort QQQ (SQQQ) is a 3x inverse ETF.
8. Best Use and Bottom Line:
- SQQQ is suitable for very short-term short bets against the Nasdaq 100.
- Best used as a specific and small satellite holding in an aggressive investor's portfolio.
- Recommended for those convinced of a near-future decline in large-cap stocks.
9. Selling Short QQQ:
- Possible, as ETFs like QQQ resemble shares of stock.
- Shorting a long ETF or going long an inverse ETF depends on the trader's preference.
In conclusion, the ProShares UltraPro Short QQQ is a complex and high-risk financial instrument, best approached with a clear understanding of its dynamics and a specific short-term investment strategy.
