What Happens When You Combine Leverage With the Greatest Uptrend in History?

By Charlie Bilello

02 Sep 2021

A 17,320% gain in 11.5 years.

That’s what happens when you combine 3 turns of leverage with the greatest uptrend in history, the incredible move higher in the Nasdaq 100.

The 3x Long Nasdaq 100 ETF ($TQQQ) was launched in February 2010.

Since then it has advanced 17,320% (56% annualized) versus a gain of 890% (22% annualized) for the unleveraged Nasdaq 100 ETF ($QQQ).

Data via YCharts as of 9/1/21

How in the world is that possible? If you ask most people about leveraged ETFs, they will likely tell you that “they all go to 0 over time,” or that “if you hold them for more than a few days, you will surely lose money.”

Well, as it turns out (and the above chart proves)…

  • There is no “natural” decay from using leverage over time (they don’t “have to” go to 0).
  • The idea that leverage is only suitable for short-term trading is a falsehood (you can certainly hold for more than a few days and make money).

That’s not to say that leverage is without risk – there is increased risk in using any amount of leverage, and a tremendous amount of risk in using 3x leverage. But the source of that risk does not come from some inherent decay.

What does cause significant problems in using constant leverage over time?


Daily re-leveraging (back to 2x, 3x, etc.) combined with high volatility creates compounding issues, often referred to as the “constant leverage trap.” When the path of returns is not trending but instead alternates back and forth between positive and negative returns (seesawing action), the act of re-leveraging is mathematically destructive. The reason: you are increasing exposure (leveraging from a higher level) after a gain and decreasing exposure (leveraging from a lower level) after a loss, again and again.

The opposite of this harmful scenario is an environment that is friendly to leverage: uptrends with streaks in positive performance (consecutive up days) and low volatility.

These concepts are closely related, for when the Nasdaq 100 is in an uptrend (ex: above its 200-day moving average), it tends to exhibit lower volatility and more streaks in performance.

We’ve seen that in spades since February 2010 ($TQQQ launch), as the Nasdaq 100 has been in an uptrend 89.3% of the time. This is significantly higher than the long-term average of 73.6% going back to March 1999 (inception of Nasdaq 100 ETF). And the annualized volatility of 19.6% for the Nasdaq 100 has been significantly lower than the longer-term average of 27.6%.

In 2021 thus far, the Nasdaq 100 has been in an uptrend 100% of the time, with an annualized volatility of 18.5%. It’s no surprise, then, that TQQQ is faring quite well, up 65.4% versus a gain of 21.6% for the unleveraged QQQ.

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So what’s the catch? Why doesn’t everyone just put 100% of their portfolio into leveraged ETFs like TQQQ?

Because almost no one can stomach the extreme volatility that comes with it. This has been a relatively calm period for markets and TQQQ still has annualized volatility of over 57% since its inception.

While investors love upside volatility, it’s the downside that causes problems. Most investors would have a hard time sitting through the higher drawdowns that go hand-in-hand with increased leverage. Even in an extended period of tranquility for U.S. equities, drawdowns for the 3x leveraged Nasdaq 100 have been considerable (max of 70% back in the 2020 crash, with many other 40+% declines).

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In a more severe and extended decline, the damage can be nearly impossible to come back from. Had the 3x leveraged Nasdaq 100 ETF been around in March 2000, it would have lost over 99.94% during the ensuing bear market that took the Nasdaq 100 down by more than 80% to its low in October 2002. A 99.94% decline would bring a $10,000 investment down to just $6.

Note: hypothetical, does not include additional fees that investors in the leveraged ETF would have incurred.

The math behind declines is important here. A 99.94% loss requires a gain of nearly 200,000% just to break even. Needless to say, a 200,000% gain doesn’t happen overnight. At a 10% annual return it would take almost 80 years of compounding to hit 200,000%. And that assumes a straight line higher, which is not the way markets work. If there’s another crippling bear market with high volatility in that eighty year period (a near certainty), this timeline could very well be extended by decades or more.

Still, given the right environment (uptrends with low volatility), investors can certainly buy and hold a 3x leveraged exposure for years on end and make tremendous gains. The last 11+ years have proven that and it’s a myth to say otherwise.

But who could have actually held a position throughout the last 11+ years, including the 70% decline last year? That’s the question.

The real problem with a 3x leveraged buy-and-hold strategy is that it magnifies the primary issue with unleveraged buy-and-hold: that it is hard to hold through large drawdowns. Many investors do not have the temperament to withstand a 20% decline, let alone 40%, 60%, 80% or 99.94%.

We haven’t had to worry much about declines this year, but risk has not been eradicated. There is no free lunch in markets, and the use of extreme leverage to amplify returns is no exception to this rule. The tremendous gains experienced in recent years will be followed at some point by tremendous losses. There’s no other way.

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

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