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I was looking at return of TQQQ, and was surprised with result.

I understand that, it is not equity based ETF, and is using derivatives. But I could not understand who is acting as counter party of this ETF, for it (TQQQ) to make money 15 folds in 5 years, someone has to loose that much.

So if members can answer and put their views on how this performance.

Note ( taken from comment by Link Ng): LETFs could be evil probably because of leverage decay:

  1. In a sideway market TQQQ gives a worse performance than expected +3x due to daily leverage reset.
  2. Leverage decay gives a return that is better than +3x in continuous bull run market.
  3. A loss worse than -1x but better than -3x in a continuous bear run.
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If you look at the holdings of TQQQ you will find that the swap counterparties are investment banks: UBS, Goldman Sachs, BoA etc.

These counterparties do not (usually) invest with their own money. Instead, they invest on behalf of their customers, who may have different investment aim and risk tolerance than those purchasing TQQQ. For example, a millionaire may be willing to limit his upside to, say, 5% per year, in exchange for limiting his downside to -5% per year to preserve their capital. All gains by QQQ in excess of 5% will not go to that millionaire, but to other products packaged and sold by the bank to others, for example packaged as a swap and sold to leveraged fund.

In addition there is also inverse (and inverse leveraged) ETFs. Most of them also employ swaps sold by the same list of investment banks. Banks are able to pass their loss (TQQQ's gain) onto inverse ETFs.

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  • interesting points , is this 72%+ phenomenon shown by TQQQ could last in near future, I see people calling leveraged ETF as EVIL, but numbers shows a better story
    – puzzled
    Dec 3, 2021 at 3:13
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    Past performances do not guarantee future result. No one can say whether TQQQ's gain could last in near future without a crystal ball. People call LETFs evil probably because of leverage decay: In a sideway market TQQQ gives a worse performance than expected +3x due to daily leverage reset. But leverage decay gives a return that is better than +3x in continuous bull run, and a loss worse than -1x but better than -3x in a continuous bear run.
    – Link Ng
    Dec 3, 2021 at 12:23
  • Leveraged ETFs are not evil, but they're dangerous. If you don't know what you're doing you can get clobbered easily.
    – D Stanley
    Dec 6, 2021 at 21:01
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There's not one single counterparty for TQQQ. Like you said, it uses derivatives to give you 3X exposure to the NASDAQ-100. Those derivatives are traded with multiple other counterparties, who may be using those derivatives to hedge exposure with other counterparties. So the "loss" will be spread over thousands of other counterparties, and they may have offsetting gains in other trades unrelated to yours.

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