TQQQ vs SQQQ: better ETF to buy as the Nasdaq 100 index falls?

The ProShares UltraPro QQQ (TQQQ) and ProShares UltraPro Short QQQ (SQQQ) ETFs moved in different directions on the first trading day of September. 

SQQQ surged by over 9.15% while the TQQQ fund crashed by a similar amount. This retreat happened as the Invesco QQQ ETF (QQQ) fell by 3% and retested the key support at $460, its lowest point since August 2024. 

QQQ, which tracks the tech-heavy Nasdaq 100 index, has dropped by over 8.26% from its highest level this year, meaning that it is nearing a correction zone. 

AI trade is losing momentum

The main reason for the ongoing tech stocks crash is that the artificial intelligence (AI) trade that has driven the market higher in the last two years has started to fade. 

Nvidia (NVDA), the most popular AI stock dived by almost 10%, shedding billions of dollars in value. It has now crashed by over 23% from its highest point this year, meaning that it is in a deep bear market. 

Nvidia shares have crashed even after the company published strong financial results. Sales jumped by over 115% in the last quarter to over $30 billion while its forward guidance for the third quarter is that its revenue will jump to over $32 billion. 

For the year, analysts expect that its revenue will hit $125.5 billion followed by $178 billion in 2025. Nonetheless, there is a fear that demand for its advanced GPUs will start to fall in the coming years, which explains why the stock has nosedived.  

Nvidia is not the only AI stock that has dropped sharply this year. C3.ai, a company that provides AI software to companies, has crashed by over 52% from its highest point in 2023 and by 38% from the year-to-date high. 

Palantir Technologies stock has done better as it has dropped by over 8% from the year-to-date high. Super Micro Computer (SMCI) has fallen by 63% while SoundHound has fallen by 62%.

Nvidia is a core part of QQQ, TQQQ, and SQQQ ETFs because it is the third-biggest holding by the Nasdaq 100 index after Apple and Microsoft. 

Tom Lee warns on stocks

The other main reason why the QQQ and TQQQ ETFs crashed hard is a warning by Thomas Lee, the highly respected analyst who founded FundStrat.

In an appearance in CNBC on Tuesday, he warned that investors should brace for a correction in the next few months as the US heads to an election. This performance is also in line with what I predicted in July, when I noted that the S&P 500 index would suffer a deep reversal.

In his statement, Lee noted that investors tend to be risk averse toward a US election as the uncertainty about policies remain.

Trump and Biden have now highlighted their economic proposals, which if implemented, will have an impact on equities. Donald Trump’s core economic proposal is to levy tariffs on imports while Kamala has pledged to hike taxes to fund housing.

Thomas Lee also noted that equities had risen in six months this year and that a pullback would be appropriate. 

His statement was notable because he is one of the most accurate analysts in Wall Street and has constantly been a bull. He maintains a bullish bias, noting that any crash will be a buying opportunity. 

Stocks have also retreated because a Fed interest rate cut has now been priced in by market participants. On Tuesday, reports by ISM and S&P Global showed that the manufacturing PMI declined in August. If Friday’s jobs report comes out weaker than expected, it means that the Fed will deliver a 0.50% cut in September.

TQQQ vs SQQQ: better buy?

Therefore, with stocks showing some volatility, risk-taking investors may consider investing in either TQQQ or SQQQ. These two are leveraged funds that experience three times the movement of the Nasdaq 100 index. 

The TQQQ fund rises three times when the Nasdaq 100 index rises while the SQQQ rises when the index falls. 

As a result, over the years, the two funds have moved in the opposite direction. Since tech stocks have surged in the last decades, the TQQQ has done much better while the SQQQ has dropped by over 99%.

As I have written before, I believe that the TQQQ ETF is still the better fund to invest in compared to the SQQQ. It is difficult to predict the future, which explains why the past is so important. 

Historically, dips in the Nasdaq 100 index and US equities have been brief since stocks ultimately bounce back. For example, top indices crashed at the onset of the COVID-19 pandemic in 2022 and during the Global Financial Crisis (GFC) in 2008/9 and then recovered.

Buying the SQQQ is mostly betting against America, something that Warren Buffett has always recommended against.