Is 2x LETF (QLD/TQQQ) Functionally the Same as Using Margin? A Comparative Analysis

I've been analyzing leveraged ETFs (LETFs), particularly QLD (2x QQQ) and TQQQ (3x QQQ), to see how they compare with using margin to achieve the same leverage. My findings suggest that LETFs might perform nearly identically to margin investing—assuming competitive broker interest rates. However, I'm looking for feedback from the community to validate my approach.

# My Approach & Findings

1. **Simulating 2x Leverage on QQQ**
* 100% **QLD**
* Manually leveraged portfolio of **50% QQQ and 50% TQQQ**
* Traditionally leveraged portfolio of 100% QQQ and another 100% QQQ that incurs daily interest
* Initially, this approach suggested LETFs were slightly worse due to the drag from expense ratios.
* However, when factoring in TQQQ (3x LETF) + QQQ (1x), the combined expense ratio actually outperformed a pure 2x margin strategy.
2. **Factoring in Interest Rate Costs for Margin**
* To simulate traditional leverage, I incorporated the **federal funds rate** as a proxy for margin loan costs.
* This wasn’t ideal because broker rates aren’t necessarily tied to the fed funds rate, so I added a **1% premium to better reflect real-world brokerage lending rates**.
* With this adjustment, the **returns of margin investing and LETFs converged closely**.
3. **Key Takeaway: Competitive Margin Rates Make LETFs Less Appealing**
* If a broker charges **1% above the fed funds rate**, leveraged investing with margin looks **almost identical** to LETFs in performance.
* If the broker rate is **1.5%+ above the fed funds rate**, LETFs **become the better option** due to lower effective costs

[Traditional Leverage has similar returns to LETFs when competitive brokerage interest rate is used](https://preview.redd.it/9akjo4aaz1le1.png?width=1280&format=png&auto=webp&s=918976feffc51dcc6d7cdfe390b37697282f637a)

# Questions for the Community

1. **Is my methodology sound?** Am I missing any critical factors that would make LETFs behave differently from margin investing?
2. **How well does my margin cost assumption hold up?** What are realistic margin rates that retail traders actually get?
3. **Other risks I should consider?** I know LETFs have compounding decay, but in a strong uptrend, this isn’t as big of an issue.

Would love to get some feedback before I refine this further. Appreciate any critiques or suggestions!

[Additional Pictures for reference](https://github.com/samuelcheongws/letf-comparison/blob/main/README.md)

[Code for reference](https://github.com/samuelcheongws/financial-market-testing)