I get asked all the time by more conservative traders if it works to trade the TQQQ Trading Strategy using a 2x ETF. Some people view the 3x ETF $TQQQ as too aggressive. If you are one of those people, then read on to see how using QLD performs.
What is a 2x ETF and a 3x ETF
There are two main leveraged ETFs that attempt to amplify the returns of the Nasdaq ($QQQ).
The first is the TQQQ which is a three times leveraged ETF. This leveraged ETF seeks a return that is 3x the return of QQQ for a single day.
This is the symbol the TQQQ Trading Strategy is based on.
A less aggressive alternative to the 3x ETF is the 2x ETF called QLD. This leveraged ETF seeks a return that is 2x the return of QQQ for a single day.
Both are good options if you are looking to trade something with leverage. Just remember that although these levered ETFs can go up 2x or 3x as past as the QQQ, the also can come down just as fast.
That is why having a good system to trade them is important.
Comparing the 2x ETF and 3x ETF Performance
If you are just not comfortable trading a 3x ETF and want to consider a 2x ETF, then let’s look at how that has performed.
We can start with the performance of the 3x TQQQ.
Below is an equity chart for the TQQQ Trading System (using TQQQ) from January 1, 2016 to December 31, 2019.
Using $25,000 of starting capital in the TQQQ Trading Strategy, the equity curve looks like this:
A relatively stable and consistent equity curve. Compared to the equity curve on the S&P500, it looks good.
Another key point is that the drawdown for the above period for the TQQQ Trading Strategy was -13.71%. As a comparison, the $SPX (S&P500) had a drawdown of -19.78%. The QQQ had a drawdown of -22.80%. The system beat both of these ETFs from a risk-adjusted return perspective.
Now let’s see how using QLD instead of TQQQ would have performed. Again, using the same dates of January 1, 2016 to December 31, 2019 and with a starting capital of $25,000, here is the equity curve:
Compared to the TQQQ, using QLD with the TQQQ Trading Strategy generated approximately $12,000 less. However, it still beat the S&P500. Risk adjusted returns for the period for the QLD was +117.67% versus +12.59% for the S&P500.
Drawdowns were also better once again. The maximum system drawdown using QLD was –9.31% versus –19.78% for the S&P500 (and -22.80% for the QQQ). From a drawdown perspective and handling the emotional aspects of trading, using the QLD may be the better option. The lower drawdown can make it easier to trade.
So, if you were on the fence about trading the TQQQ because of the fact that it was a 3x leveraged fund, then consider using the 2x ETF QLD. It performs well, and in the study period above, showed that the system can lower drawdowns.