Today, a particular exchange-traded fund (ETF) is making waves and leaving investors scratching their heads. So, what exactly is going on with the ProShares UltraPro Short QQQ ETF (NASDAQ:SQQQ) today? Popular financial sites like Stocktwits showed a near 400% pre-market gain this morning. Sadly for holders of SQQQ stock, this isn’t the case.
Did the SQQQ ETF Really Gain 400%
A 1-for-5 reverse stock split is to blame for the SQQQ ETF’s seemingly high returns. In addition, the stock split became “effective prior to market open on January 13, 2022,” or this morning. This signifies that if an investor held five shares of SQQQ at yesterday’s close, the investor now owns one share as of this morning. Consequently, the price of the SQQQ ETF increased by five times.
However, the reverse stock split has no effect on SQQQ’s market capitalization. While the number of shares owned changes, the value of the shares does not. Furthermore, when reverse stock splits or stock splits occur, many financial sites often have a lag in data that makes it seem like the stock increased or decreased in price by massive percentages. These events often confuse many investors who are not up to date on the latest news.
Did the TQQQ ETF Really Fall 50%?
Stocktwits also showed a near 50% decline in the ProShares UltraPro QQQ ETF (NASDAQ:TQQQ) this morning. Like SQQQ, this is not the case. Instead, the TQQQ ETF engaged in a 2-for-1 stock split that became effective this morning. As a result, the price of the TQQQ ETF decreased by half, while the total market cap remained constant. Additionally, investors who owned one share of the TQQQ ETF at yesterday’s close now own two shares as of this morning.
How to Trade the SQQQ and TQQQ ETFs
SQQQ and TQQQ act as leveraged ETFs that track the Nasdaq-100. The SQQQ ETF seeks to track the Nasdaq-100 index and provide a 3X inverse return before fees and expenses. In theory, if the Nasdaq-100 falls 1%, then the SQQQ ETF should rise by 3%. On the other hand, the TQQQ ETF seeks to track the Nasdaq-100 index and provide 3X the return before fees and expenses. So, if the Nasdaq-100 rises by 1%, the TQQQ ETF should rise by 3%.
It should be noted that the SQQQ and TQQQ ETFs are prone to time decay because they are made up of financial derivatives. Time decay can be caused by factors such as “transaction expenses, managing cost, interest expense of debts, etc.” Therefore, investors should plan on not holding these leveraged ETFs for long periods of time.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
