David's Blog

Why I’m Buying SQQQ in a Down Market

By David Li on Friday, 13 April 2023
rbc stock analyzer

In today’s uncertain economic climate, many investors are looking for ways to protect their portfolios from market downturns. One strategy that I have decided to employ is buying the ProShares UltraPro Short QQQ (SQQQ) ETF.

SQQQ is a 3x leveraged inverse ETF that tracks the Nasdaq 100. This means that if the Nasdaq-100 falls by 1%, then SQQQ should rise by 3%. In other words, SQQQ seeks to return the exact results of the Nasdaq 100 index times negative three.

So why am I buying SQQQ in a down market? There are several reasons.

First and foremost, SQQQ provides an opportunity to profit from market downturns. When the stock market falls, traditional long-only investments such as stocks and mutual funds will also fall in value. However, because SQQQ is an inverse ETF, it will rise in value when the market falls. This can provide a hedge against losses in other parts of my portfolio.

Secondly, SQQQ provides leverage. Because it is a 3x leveraged ETF, it seeks to return three times the inverse of the daily performance of the Nasdaq-100. This means that if the Nasdaq-100 falls by 1% on a given day, then SQQQ should rise by approximately 3%. This leverage can magnify returns (or losses) and can provide an opportunity for greater profits (or losses) than would be possible with an unleveraged investment.

Of course, there are also risks associated with investing in SQQQ. Because it is a leveraged ETF, it can be more volatile than an unleveraged investment. Additionally, because it seeks to return the inverse of the daily performance of the Nasdaq-100 index times three, its returns may not match those of the index over longer periods due to compounding effects.

Faster, bigger interest rate hikes are raising the odds for a recession. Consumers could see interest rates on debt rise, layoffs, and more stock market losses. The Federal Reserve promises to do “whatever it takes” in its fight against soaring inflation.

In finance, headwinds refer to conditions that impede or inhibit progress and shares the same meaning for impacts to economies, industries, and individual companies. The factors that lead to a decrease in value or growth of the economy or the company are called headwinds.

From one perspective, there are two headwinds for markets over the next year: valuations and earnings expectations. Multiple compression – i.e., the price that an investor will pay for future earnings – is happening in markets.

Some investors believe that higher interest rates will force the stock market lower in the short term but will eventually lead to an economic boom. Others fear that raising interest rates will plunge the economy into a recession and possibly a stock market crash.

In conclusion, I believe that buying SQQQ in a down market can provide an opportunity to profit from market downturns and hedge against losses in other parts of my portfolio. However, it is important to carefully consider the risks associated with investing in SQQQ before making a decision. Because it is a leveraged ETF, it can be more volatile than an unleveraged investment. Additionally, because it seeks to return the inverse of the daily performance of the Nasdaq-100 index times three, its returns may not match those of the index over longer periods due to compounding effects.

It is also important to note that SQQQ is not intended for long-term buy-and-hold investing. It is designed to be used as a short-term trading tool and should be monitored closely.

In conclusion, while buying SQQQ in a down market can provide an opportunity to profit from market downturns and hedge against losses in other parts of my portfolio, it is important to carefully consider the risks associated with this investment strategy before making a decision.

© Copyright 2024 by FriendlyUsers Tech Blog. Built with ♥ by FriendlyUser. Last updated on 2024-04-15.