TQQQ vs. QQQ – What’s the Difference Between These ETFs?

Exchange-traded funds (ETFs) are a relatively new investment vehicle, but they’ve taken off since the launch of the first fund in the 1990s. Today, these investments account for more than one-quarter of the entire stock market’s capitalization. 

Unlike mutual funds, ETFs are highly accessible, trading on major exchanges like the Nasdaq and New York Stock Exchange (NYSE). 

The ProShares UltraPro QQQ (TQQQ) and the Invesco QQQ (QQQ) are two of the most popular funds in this asset class as of late, and for good reason. Both funds have a heavy tech stock weighting, a sector that saw dramatic growth in 2021. Although tech stocks took a big hit in early 2022, many investors are betting on a rebound and diving into these growth funds. 

What are the differences between the TQQQ or the QQQ funds, and which is better?

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TQQQ vs. QTQQQ vs. QQQ – What’s the Difference Between These ETFs?

The TQQQ and the QQQ funds are both ETFs, and they both use the Nasdaq 100 index as a benchmark, but that’s where their similarities stop. 

QQQ is a traditional ETF that invests in the same stocks listed on the Nasdaq 100, which features the 100 largest non-financial companies listed on the Nasdaq index. In essence, it’s a large-cap growth index fund. By contrast, TQQQ is a 3x leveraged ETF that uses derivatives known as swaps to generate three times the daily returns of the Nasdaq 100. 

What Is Invesco QQQ (QQQ)?

The Invesco QQQ is a tech-heavy index fund. The fund’s portfolio features companies with massive market capitalizations like Amazon, Inc. (AMZN), Apple Inc. (AAPL), Microsoft Corporation (MSFT), and Tesla Inc (TSLA). Aside from the tech sector, it also has holdings in large health care, industrial, and consumer discretionary stocks. 

The fund isn’t leveraged. Instead, it’s a traditional large-cap growth ETF that invests in the largest 100 non-financial companies listed on the Nasdaq. 

As a traditional large-cap growth ETF, the fund is perfect for you if you’re a long-term investor who’s focused on the growth investment strategy

Pros of QQQ

The Invesco QQQ is one of the most popular funds on the market today and offers its investors plenty of perks. Some of the biggest include:

  1. Best Performing Large-Cap Growth Fund. The fund is the best performing large-cap growth fund over the past 15 years by total return.  
  2. Tax Advantages. As an index fund, investments are generally held in the fund’s portfolio for the long term. Most investors in the fund have long-term time horizons. As a result, gains from the fund generally qualify for lower, long-term capital gains rather than being taxed as ordinary income. 
  3. Relatively Low-Cost. Index funds are passively managed and known for low expense ratios. This fund is no different, with an annualized cost of just 0.20%.  
  4. Dividend Income. Most growth investments don’t pay dividends. However, the dividend yield on the QQQ sits at 0.55%. Sure, that’s not going to deliver massive dividend payments, but it will add to your total returns when you invest in the fund.
  5. Diversification. The fund’s holdings include 100 of the largest non-financial companies listed on the Nasdaq, so it’s a great option for adding diversification to your portfolio. 
  6. Hands-Free Investing. You don’t have to worry about managing and balancing your investments when investing in QQQ. The pros handle the leg work of updating the holdings in the fund for you. 

Cons of QQQ

There are plenty of reasons to dive into the Invesco QQQ, but there are also a few drawbacks you should consider first. The most important include:

  1. High Cost Compared to the Most Competitive Index Funds. The QQQ’s expense ratio is reasonable, but there are several index funds from providers like Vanguard and Fidelity that come with expense ratios below 0.10%. 
  2. Limited Returns. Some argue that index fund investments provide limited returns due to their high levels of diversification. If you’re looking for the most aggressive returns, you may want to build your own portfolio of 20 or fewer thoughtfully-chosen stocks.
  3. Give Up Control. When you invest in an ETF, you hand control over your investments to the fund’s manager. You’re also handing over your voting rights. You’ll need to build your own portfolio of stocks if you want complete control over your portfolio and the voting rights that come along with the shares you own.   

What Is ProShares UltraPro QQQ (TQQQ)?

The ProShares UltraPro QQQ is a 3x leveraged ETF that’s intended to produce three times the daily returns of the Nasdaq 100. The fund experiences some of the highest liquidity in the leveraged fund space, making it a perfect option for short-term trading strategies. 

It’s important to note that leveraged funds seek to produce multiple times the returns of their underlying indexes, but those returns aren’t always positive. Leveraged gains are impressive when the Nasdaq 100 is experiencing a bull market session. However, the leveraged declines are painful when the index is down. 

TQQQ is best for intraday trading strategies, rather than long-term investments, due to high levels of volatility and significant downside risk for long-term holders. 

Pros of TQQQ

There are plenty of benefits to trading the TQQQ. Some of the biggest perks include:

  1. High Liquidity. The fund is one of the most liquid leveraged funds on the market today, so you won’t have any issues diving in or making your exit when the time is right.  
  2. Fast Pace. The fund moves at three times the speed of the Nasdaq 100 market index, an index focused on large-cap growth. As such, the fund creates a fast-paced trading environment that’s exciting and potentially lucrative. 
  3. Derivative Exposure. This fund, along with most leveraged ETFs, provides direct exposure to derivatives. Derivatives are known for producing potentially larger returns than their underlying securities.  
  4. Stop-Loss & Limit Orders. Leveraged ETFs trade like stocks, unlike mutual funds that trade at the end of the trading session. As a result, TQQQ traders can place stop-loss and limit orders to lock in gains and limit extreme losses should the Nasdaq 100 start moving in the wrong direction.  

Cons of TQQQ

With the possibility of delivering triple the returns of the tech-heavy Nasdaq 100, the ProShares UltraPro QQQ fund seems like a great option for everyone at first, but there are a few significant drawbacks to consider before diving in. 

  1. High Cost. Leveraged funds are known for high expense ratios, and TQQQ is no different. The fund costs 0.95% annualized, which is extremely high compared to traditional index funds. 
  2. High Risk. The Nasdaq 100 is a growth fund that’s already known for volatility. However, this fund triples that volatility in an attempt to produce outsize returns. This means the risk of loss is substantially higher — and losses occur faster — with this fund than with the QQQ.  
  3. Beginner Investor Misconceptions. The TQQQ was developed more as a trading vehicle than investing vehicle. In many cases, beginner investors see the TQQQ and its promise of 3x returns and decide to dive in. Unfortunately, this can lead to extreme losses that can deter a beginner from continuing to participate in the market.  
  4. Higher Tax Rate. The fund is meant to be held for the short term, so you won’t benefit from the lower long-term capital gains tax rate you’d experience if you invest in the QQQ and hold for longer than one year.  

The Verdict: Should You Choose the TQQQ or QQQ ETF?

You Should Invest in TQQQ If…

TQQQ is a better fit if:

  • You’re a Day Trader. The fund is known for high levels of volatility, meaning there are plenty of opportunities for day traders. The fast-paced price action caused by the leverage in the TQQQ is attractive to scalpers and other day traders. 
  • You’re in a Bull Market. During bull markets, the fund is known for high growth. As long as you stay on top of your investment, it has the potential to generate significant gains when the overall market trend is positive. 
  • You’re Risk Tolerant. Leveraged ETFs come with a high level of risk compared to other investment vehicles. You should only consider investing in them if you’re comfortable with accepting big risks in the hunt for big returns. 
  • You Have Solid Technical Analysis Skills. Short-term trades should only be attempted by traders who have the skills to spot trends on charts and decipher technical signals. The TQQQ may be a great option for you if that’s the case.  

You Should Invest in QQQ If…

QQQ is a better fit if:

  • You’re a Long-Term Investor. If you’re a long-term investor, you’ll want to stay away from leveraged funds. However, the QQQ is a great fit because its portfolio is made up of securities known for producing strong growth.  
  • You’re a Tech Investor. The tech scene has been booming in recent years, and although it tapered off earlier this year, many believe it’s poised for a rebound. If you want in on the action, the heavy tech weighting in the QQQ’s portfolio is a perfect way to gain exposure to a broad group of tech stocks.  
  • You Have a Moderate Appetite for Risk. The fund is nowhere near as risky as its leveraged counterparts, but it is a growth play. Growth stocks are known for relatively high levels of volatility that may make you uncomfortable if you’re risk-averse. So you’ll need at least a moderate risk tolerance.  
  • You Want Diversification Without Work. If you’re interested in a diversified portfolio of large-cap growth stocks but don’t want to take on the research involved in building your own, the QQQ is a great option. 

Final Word

At first glance, the TQQQ and QQQ may seem like similar investment options, but as you dive in, you’ll realize the two are apples and oranges. They’re two very different assets designed for two very different types of market participants. 

If you’re a thrill-seeker who wants a chance to grab onto the biggest gains and craves action in your investment activities, leveraged funds like the TQQQ are a great option. However, it’s important that you consider the risks, have strong technical analysis skills, and stick to your trading strategy when trading any leveraged play. 

On the other hand, if you’re a long-term investor who’s more interested in building a sturdy financial foundation and a strong retirement, the QQQ may be a better place to start. If you’re a risk-averse investor, you may want to consider other, more diversified funds like the Vanguard Total Stock Market ETF (VTI). 

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