Could I Interest You In 59,000%?

First up is the Direxion Daily Technology 3X Bullish ETF (TECL) which is the best performing ETF of all time according to this week's ETF IQ. Testfol.io has it up 59,515% since its inception in 2008. The reference security is the index that underlies the Technology Sector SPDR (XLK). XLK is up 2239% in the same period. The difference of course captures the compounding effect that can work for fund holders or against them, in this case for them. 

I would imagine the dispersion between the two can be attributed to being long tech sector volatility is the right side of the trade far more often than not. For a little context, a working theory here is that levered long funds are more like a combo of the underlying plus the volatility of the underlying, not necessarily 2X or 3X the underlying. 

Since TECL's listing, XLK is up pretty close to 20X, looking forward to the next 17 years, how much will XLK go up? That's not knowable of course but assuming there's no sort of catastrophic outcome like the 1930's, it's a good bet that the S&P 500 will be up a good bet and that XLK will be up more. As we've talked about before, the tradeoff for usually being up more is that in down markets, XLK should be expected to go down more.

Look at TECL's drawdown history.

The hover is over a 59% drawdown at the end of 2018. The market fell for pretty much no reason and came right back but 59% for a quickly forgotten decline is really something. It fell 66% during the April panic this year and yet it is up 54% YTD! 

I'm not suggesting anyone should by TECL but it makes a dramatic version of a good point. Holding long term, especially indexes, will occasionally be difficult but a broad based index or an established sector or industry is not going to go to zero. Selling a broad index fund or established sector or industry just because it is down is a mistake. 

Because it's related, here's a Tweet from Mark Yusko.

The best companies occasionally go down a lot. Whatever the best performing stock will be for the next ten years will have plenty of drawdowns. Nvidia has been one of the best performing stocks of the last ten years if not the best. To paraphrase hall of fame picture Dennis Eckersley, Nvidia goes down 40% just to stay in shape on it's way to a 22,000% cumulative return in the last ten years including 35% drop this past April. 

I got an email noting that investors have been rotating out of JEPI, sells calls on S&P 500 stocks, and into JEPQ, sells covered calls on NASDAQ stocks. 

Since JEPQ listed, markets have mostly moved higher so it makes sense that JEPQ has had a more volatile ride to better returns. It's impressive that JEPQ price only has compounded positively despite its large payout. It's a "high" yielder but it's not a crazy high yielder. Staying slightly ahead of a 12% yield is not easy but JEPQ shows it's possible. Keeping up with "yields" like 30-40%, the low end of the crazy high yielders, is not really a repeatable thing. Yes, in a random year, it can happen but it's not reliably repeatable. 

Who knows if it can keep that up but for someone being ok inefficient (from a tax perspective) portfolio income, something like this is more sustainable than something that "yields" 80%. FWIW, in the same period the Global X NASDAQ 100 Covered Call ETF's (QYLD) price only compounding was negative 3.84% so you need to choose carefully. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.