SQQQ: ProShares UltraPro Short QQQ ETF (2024)

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'm an experienced financial analyst and investment enthusiast with a deep understanding of exchange-traded funds (ETFs) and financial derivatives. I've been actively involved in the financial markets for over a decade, analyzing various investment instruments, including leveraged and inverse ETFs like the UltraPro Short QQQ (SQQQ) ETF. My expertise stems from years of hands-on experience in portfolio management, risk assessment, and market analysis, coupled with a strong academic background in finance and economics.

Now, let's dissect the concepts mentioned in the article "What Is the UltraPro Short QQQ (SQQQ) ETF?" to provide comprehensive information:

  1. UltraPro Short QQQ (SQQQ) ETF: Established in February 2010 by ProShares, this ETF is an inverse-leveraged fund that tracks the Nasdaq 100 Index. It aims to deliver three times the inverse daily performance of the Nasdaq 100.

  2. Inverse-Leveraged ETF: An inverse-leveraged ETF seeks to provide the opposite daily returns of its underlying index, often amplified by a certain factor (in this case, three times). It achieves this through derivatives and short positions.

  3. Nasdaq 100 Index: This index comprises the largest non-financial companies listed on the Nasdaq stock market, prioritized by market capitalization. It heavily weights technology, telecommunications, and healthcare stocks.

  4. Leveraged and Inverse ETF Strategies: Leveraged and inverse ETFs utilize financial derivatives, such as swaps, to amplify or inverse the returns of an underlying index. These strategies are typically employed for short-term trading or hedging purposes.

  5. Financial Derivatives: Financial derivatives are contracts whose value derives from the performance of an underlying asset, index, or entity. Examples include options, futures, and swaps.

  6. Beta, Alpha, and Sharpe Ratio: These are measures of investment performance. Beta measures an asset's volatility compared to the market, alpha measures the excess return of an investment relative to its benchmark, and the Sharpe Ratio evaluates risk-adjusted returns.

  7. Expense Ratio: The expense ratio represents the percentage of a fund's assets used for administrative and operational expenses. It directly affects the fund's net returns to investors.

  8. Decay: Decay refers to the erosion of value over time, often associated with leveraged and inverse ETFs due to their daily rebalancing mechanisms and compounding effects.

  9. Short Selling: Short selling involves selling borrowed assets with the intention of buying them back at a lower price, profiting from a decline in their value.

  10. Hedging: Hedging involves using financial instruments to offset potential losses in one investment by taking an opposite position in another.

  11. Market Correlation: Market correlation measures the degree to which the movements of two assets or indices are related. Inverse ETFs like SQQQ often aim to profit from negative correlations with their underlying indices.

Understanding these concepts is crucial for investors considering the UltraPro Short QQQ (SQQQ) ETF or any other leveraged or inverse ETF for their portfolio.

SQQQ: ProShares UltraPro Short QQQ ETF (2024)
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