Comparing the performance of leveraged Nasdaq-100 ETFs reveals that QLD's 2x leverage often provides better long-term risk-adjusted returns than TQQQ's 3x exposure due to the compounding effects of volatility drag.
The article highlights QLD's lower leverage preserving capital during crashes and better 5-year annualized returns compared to TQQQ.
The article notes TQQQ's higher leverage leads to larger drawdowns but better 10-year returns, with a 79% loss in 2022.
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While TQQQ offers higher upside during bull markets, its 3x leverage creates severe drawdown risks during downturns. Data shows that QLD's 2x leverage preserves more capital during crashes, leading to superior 5-year annualized returns as volatility drag erodes the performance of more aggressive funds.
The phenomenon known as volatility drag, combined with daily resetting, means that higher leverage ratios can lead to compounding losses that are mathematically difficult to recover from during market downturns.