A Simple 2-ETF Strategy That Outperforms the Nasdaq

Imagine a trading strategy so simple it takes just five minutes a year to manage, yet it has outperformed the Nasdaq for over a decade. That’s exactly what @thechartist showed on X.

This strategy, pairing two ETFs with a once-a-year rebalance, has delivered a remarkable 18% compound annual growth rate (CAGR) since 2012, with a maximum open drawdown of -28%.

Let’s dive into how this minimalist approach works and why it might be worth considering for your portfolio.

Table of contents:

The Strategy: Simplicity Meets Performance

At the heart of this strategy is a two-ETF portfolio combining an anti-beta ETF and a 3x leveraged Nasdaq fund, specifically TQQQ, which tracks the Nasdaq-100 Index with triple leverage, and BTAL.

The anti-beta ETF (BTAL) acts as a hedge, aiming to reduce volatility, while TQQQ amplifies returns during bullish trends. The key? A once-a-year rebalance on the first trading day of January to restore the portfolio’s target weights. That’s it—just five minutes of work annually.

A simple 2-ETF strategy that outperforms – backtest and results

Let’s backtest the following strategy:

67% BTAL – long position. Market neutral, short beta exposure.
33% TQQQ – long position, 3x exposure to Nasdaq.

The result does not differ that much if you rebalance quarterly or annually.

This is the equity curve from 2012 until today (BTAL started trading in late 2011):

A Simple 2-ETF Strategy That Outperforms the Nasdaq

The annual return is 18%, and the max drawdown is 28%.

You might want to swap TQQQ with QLD (2x leverage to Nasdaq 100).

Why It Works: Patience Over Tinkering

The strategy’s success hinges on its simplicity and low maintenance. Unlike high-frequency rebalancing, which can exacerbate volatility drag on leveraged ETFs like TQQQ, the annual rebalance minimizes trading.

Leveraged ETFs thrive when markets trend upward but suffer during whipsaws—sharp, short-term fluctuations. Frequent rebalancing forces investors to buy back into TQQQ after every pullback, compounding losses due to volatility decay.

By contrast, the once-a-year approach lets the portfolio ride long-term trends, delivering higher returns.

This aligns with the strategy’s philosophy: keep it simple, avoid emotional panic during market dips, and let the system work.

Challenges and Considerations

The leveraged nature of TQQQ introduces operational risks, and deep market crashes can still sting—though the -15.7% max drawdown is notably lower than QQQ’s 2022 plunge.

The anti-beta ETF helps cushion these blows because it rises when there is turmoil in the markets, but no strategy is immune to market turmoil.

The strategy also raises a question: Is it too simple? In a world of complex algorithms and active trading, a five-minute annual check-in feels almost suspicious. Yet, the backtested results suggest that simplicity can be a strength, especially when paired with disciplined execution.

Conclusion

The 2-ETF strategy is a compelling case study in the power of simplicity. By combining an anti-beta ETF with TQQQ and rebalancing just once a year, this approach has outperformed the Nasdaq 100.

It’s not a magic bullet, and leveraged ETFs carry risks, but for investors seeking a low-effort, high-return system, it might be worth considering.