FNGU Deep Dive Part 2 of 3
Strong returns with deep drawdowns
Yesterday I analyzed the returns generated by FNGU over several periods in time. Indeed the returns have been quite good and in fact better than most high flying technology stocks. Today I want to look at the drawdowns.
FNGU has returned 40.23% YTD. However, it has had 5 large drawdowns already in the year. These are:
From 2/16/2021 to 3/8/2021: -42.82%
From 3/17/2021 to 3/25/2021: -22.25%
From 4/13/2021 to 5/13/2021: -34.65%
From 6/29/2021 to 8/19/2021: -19.38%
From 9/7/2021 to 10/4/2021: -26.33%
These are all fairly big drawdowns and looking at it one can question the risk-reward of using FNGU as a long-term investment instrument.
FNGU had fantastic returns in 2020 up about +350%. But again there was at least one large drawdown of -46% which literally wipes out close to half the capital.
We can compare FNGU with SPY and QQQ. It is not even close as far as returns are concerned. But again, the drawdowns are the problem. To be fair to MarketSectors they do call this out in their risks.
And for good measure we can look at 2019 and confirm this same phenomenon of strong returns and deep drawdowns.
So, what do we do? One way to look at it is to absorb the drawdowns as a part of the game and accept the risks. Certainly if one is not too concerned about capital erosion in the short-term, that can be a strategy.
But is there a way to potentially reduce the risk of the drawdowns and still generate most of the upside? There is and that is what I will cover in part 3. (End of Part 2).