What is ETF?

Vanguard ETFs: VOOV vs VUG vs VYM

[Section updated: 15 Dec 2020]

VOO | Vanguard S&P 500 ETF

Vanguard S&P 500 ETF (VOO) is the tracker for S&P 500 Index. VOO tracks a market-cap-weighted index of US large-cap and mid-cap stocks in S&P 500.

• Growth in the last 5 years: 81.68%
• Price-Earning Ratio: 33.68
• Dividend Yield: 1.59%

VUG | Vanguard Growth ETF

Vanguard Growth ETF (VUG) tracks the CRSP US Large Cap Growth Index, which selects large-cap and mid-cap stocks with growth characteristics, such as potential growth in earnings per share (EPS). Generally, growth ETFs have high PE ratio and low dividend yields.

• Growth in the last 5 years: 134.72%
• Price-Earning Ratio: 46.00
• Dividend Yield: 0.71%

VOOV | Vanguard S&P 500 Value ETF

Vanguard S&P 500 Value ETF (VOOV) is the ETF for value investors. VOOV tracks an index of primarily large-cap US stocks, selecting value stocks from the S&P 500. Generally, Value ETFs have moderate PE ratio and moderate dividend yields.

• Growth in the last 5 years: 44.76%
• Price-Earning Ratio: 31.58
• Dividend Yield: 2.26%

VYM | Vanguard High Dividend Yield ETF

Vanguard High Dividend Yield ETF (VYM) is the ETF for dividend seekers. VYM tracks the FTSE High Dividend Yield Index. The index selects high-dividend-paying US companies, excluding REITS, and weights them by market cap. Generally, high dividend ETFs have low PE ratio and high dividend yields.

• Growth in the last 5 years: 37.18%
• Price-Earning Ratio: 25.96
• Dividend Yield: 3.14%

5-year Price Appreciation: VOO, VUG, VOOV, VYM

What are leveraged ETFs?

Leveraged exchange traded funds (ETFs) aim to amplify the returns of an index or target fund.

A regular ETF such as Invesco QQQ Trust Series 1 ETF (QQQ) aims to track the return of the Nasdaq 100 Index, i.e. if Nasdaq Index goes up by 5%, QQQ goes up by 5%, and if Nasdaq goes down by 3% QQQ goes down by 3%.

A leveraged ETF aims for a multiplier of the return, for example, Proshares Ultra Pro TQQQ (TQQQ) is 3X ‘long’ on QQQ. What that means is if QQQ goes up by 5%, TQQQ goes up by 15%, when QQQ goes down by 3%, TQQQ goes down by 9%!

Similarly, there are leveraged ‘short’ ETFs as well. ProShares UltraPro Short QQQ ETF (SQQQ) is 3X ‘short’ on QQQ. So when QQQ goes up by 5%, SQQQ goes down by 15%, when QQQ goes down by 3%, SQQQ goes up by 9%.

List of leveraged ETFs

Like TQQQ and SQQQ, there are many more 2x, 3x long and short ETFs. A few of the popular ones are listed below.

Long 2X on S&P 500

ProShares Ultra S&P 500 (SSO)

Direxion Daily S&P 500 Bull 2x Shares (SPUU)

‘Bull’ ETF is a ‘Long’ ETF, so if S&P 500 goes up by 5%, SPUU and SSO go up by 10% (SPUU and SSO are 2x Long ETFs)

Long 3X on S&P 500

ProShares UltraPro S&P 500 (UPRO)

if S&P 500 goes up by 5%, UPRO goes up by 15% (UPRO is a 3x Long ETF)

Short 3X on S&P 500

ProShares UltraPro Short S&P 500 (SPXU)

Direxion Daily S&P 500 Bear 3X Shares (SPXS)

‘Bear’ ETF is a ‘short’ ETF, so if S&P 500 goes up by 5%, SPXS and SPXU would go down by 15%!

Can you hold leveraged ETFs for long term?

The answer is NO! Leveraged ETFs can be very risky because of the amplified volatility. Leveraged ETFs can be great for short term speculation and bring you great returns, but for a longer term horizon leveraged ETFs are not suitable.

See below the hypothetical returns on QQQ, TQQQ, and SQQQ over a 20+ year investment horizon.

See visualization on Tableau

All three start at $100 in January 1998. During the dot com boom, while QQQ reaches a max of 314, TQQQ hit an insane high of $1929 in March 2000 (i.e. $100 invested would have become $1929). If you are able to speculate and sell it, you can make good profits. However, look at the down side too. If you don’t sell and hold it longer, when QQQ declines to $104, TQQQ declines at an accelerated rate and falls to $27 in April 2001. That’s a huge swing in fortune!

If you keep holding TQQQ through October 2020, QQQ reaches $726, while TQQQ only manages to climb back up to $414. So, QQQ wins in this long term scenario of bull and bear markets included.

SQQQ has a dismal story. In a bull market it declines very rapidly and reaches such a low point from where it is impossible to recover to its previous price levels. As you can observe, one sharp rise in stock market drives down SQQQ to near zero levels and it stays there for a long long time.

Please be careful when investing in leveraged ETFs and understand the pros and cons before committing your money to them. Leveraged ETFs can be good for short term speculation, but buy and hold for long term is not the best strategy leveraged ETFs.