The ETF

For many investors, picking individual stocks appears to be too tall of a mountain for them to summit. Index investing was created by Vanguard years ago to solve this problem. ETFs are a more recent solution to this problem and are becoming narrower in their focus. This allows individuals to invest in baskets of stocks based on industries, sectors, or social issue.

For the last two decades, the world has seen a technological revolution. This is lead by the stocks listed on the Nasdaq exchange. There are many ETFs that track this index but the largest ETF is QQQ. QQQ is comprised of the 100 largest stocks in the Nasdaq and is up almost 600% since it launched in 1999. Since I started investing in earnest in 2009, the ETF is up over 1,100%. That means $1,000 has turned in to $12,000 over that time period. Of course it isn’t a straight line. At the end of 2018 the ETF dropped 20%+. During March of 2020 (Covid), the ETF dropped 30%+.

QQQ since 1999

Index investing is a simple way to invest in the general prosperity of the globe. However, you will miss the mind-bending moves of individual disruptors. Since 2009, Amazon has moved 4,000%; Apple: 3,000%; NFLX: 9,600%; TSLA: 20,000%

These large movers also don’t move in a straight line. And since they exceed the index’s performance on the upside, it is also normal for them to exceed the index’s performance on the downside. If the market moves down 20%, then it would not be unusual for these stocks to move down more than that. The is the part that most investors can’t stomach. We love the upside potential but we get shaken out when the stock drops.

The next question is how do we get some extra upside potential while limiting the individual stock risk. The answer is the TQQQ. This is an ETF that also follows the Nasdaq 100 but gives you 3x the move. It has increased 14,000%+ since its launch in 2010. If the QQQ goes up 1% on a day, the TQQQ will go up ~3%. If the QQQ goes down 4% on a bad day, the TQQQ will go down 12%. This 12% drop is also scary but you have the benefit of following 100 stocks instead of just one. There are probably other ways but, from my perspective, the main way this could blow up in your face is if the market is down 25%+ on a given day. The markets have mechanisms in place today to limit the downside with programmed pauses in trading at various levels. It would be really hard for the market to drop that far in a given day.

TQQQ since 2010

My ETF portfolio that I am going to track on this blog is going to be a mix of QQQ, TQQQ, SPY, & UPRO. SPY and UPRO are the S&P equivalent of QQQ and TQQQ. My next post detail the rules I am going to follow in the management of this portfolio.

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