Original photo by me, edited with Nano-Banana 2.

Leveraged ETFs — Is the risk worth it?

Most investors avoid them. Here’s what they’re missing.

“Are Leveraged ETFs worth the risk?”

I mean, who wouldn't ask that question after Googling the TQQQ chart?

Since its inception in 2010, TQQQ has gone up 39 THOUSAND PERCENT, transforming every $1 invested into $391.

The returns of leveraged ETFs over the long term appear amazing, but when you Google them, the first thing that pops up is:

“Leveraged ETFs are generally not worth the risk for long-term ‘buy and hold’ investors.”

Most people stop there and walk away.

But… why?

Why invest with only 1x leverage (aka no leverage)? Why not 1.2x, 1.5x, or 2x? Where do you draw the line?

At what point does leverage, or exposure to an index like the NASDAQ-100, stop being worth it?

Answering this question can literally be worth millions.

I also draw the line at a certain level of leverage. That level is what we call the Kelly Criterion, and for indexes like the NASDAQ-100 (QQQ), it’s around 3x leverage.

Using more than 3x leverage on QQQ creates such extreme volatility that the volatility itself drags your returns down.

But anywhere between 1x and 3x, leverage actually grows your returns faster than the volatility decay.

Kelly Criterion Curve indicator on TradingView. Screenshot by the author.

The screenshot attached above — my Kelly Criterion Curve indicator on TradingView, illustrates this well.

For QQQ, a leverage of 3.11x would have delivered the best possible returns over the period analyzed (20 years).

Does that mean you should go all in on TQQQ?

Not really. Let me explain.

If you had invested $3,000 into TQQQ 15 years ago, you’d now have $1 Million.

However, if you go all-in on 3x leverage right before a crash, you’re in for a very, very tough time. For example, in the 2022 bear market, TQQQ declined by 80%.

Although the markets spend most of the time in a bull market, there’s no guarantee that there will be no bear market tomorrow.

So, what’s the solution?

The solution is to use leverage within the optimal sizing range shown on the attached chart — between 1x and 2x.

If you think the market is overheated, stay close to 1x (for example, by mixing QLD, QQQ, and cash); if you think the market is oversold after a correction (like in late March this year), you can push your leverage closer to 2x.

I teach and implement these and many more investment strategies in my ***Henrique Wealth Academy ***— check it out for free.

The last question to ask is: How much should you allocate to leveraged ETFs?

The answer depends on your risk profile.

Remember what I said earlier:

A $3,000 investment in TQQQ 15 years ago would now be worth over $1 million. And that’s despite an 80% drawdown in 2022, a 73% drawdown in 2020, and multiple 30%+ drawdowns along the way.

Screenshot by the author.

So yes, you’ll get very good risk-adjusted returns, i.e., solid returns for the risk taken, but those moments of volatility can be psychologically tough.

For that reason, invest whatever allows you to sleep well at night. For some, it might be a few thousand dollars. For others, 5%, 10%, or 15% of your portfolio. For some, zero.

So, is the risk worth it?

Here’s my answer for you:

Mathematically and statistically, yes — but only if you can sleep well at night.

In this video, I talk about how allocating only 10% of your portfolio to a leveraged ETF can revolutionize your returns:

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Quick note: I’m just sharing my journey — not financial advice! 😊

— Henrique Centieiro 🕺🏻

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