Leveraged ETFs: a high-risk gamble you shouldn't take

Leveraged ETFs offer the prospect of amplified returns, but the reality is far riskier than many investors realize. With high volatility, hefty fees, and a tendency to underperform over time, these complex products are more of a gamble than a sound investment strategy.

Leveraged exchanged traded funds ETFs are apparently selling well. Morningstar estimates that, in the US alone, they saw net inflows of around $13 million in the 12-month period to the end of January 2025. 

These products are now firmly established. For example, the world’s largest leveraged ETF, ProShares UltraPro QQQ, has just marked its 15th anniversary. But are they worth investing in?

First, an explainer is in order. Leveraged ETFs are far more complicated than I suspect many people trading them on sites like eToro actually realise. 

What are leveraged ETFS?

In simple terms, leveraged ETFs are designed to amplify the daily returns of an underlying index or asset, using derivatives like swaps and futures. There are bull (or long) versions, which aim to deliver 2x or 3x the daily return of an index, and bear (inverse) versions, which aim to provide -1x, -2x, or -3x the daily return, allowing investors to profit when markets fall.

As well as funds offering leveraged exposure to markets like the FTSE 100 or S&P 500, there are also funds that focus on specific sectors or commodities, or even individual stocks. 

Crucially, leveraged ETFs are generally designed for short-term trading, often a single day to a few weeks at most.

Latest research suggests they aren’t worth it

Morningstar’s chief ratings officer Jeffrey Ptak recently analyzed the performance that leveraged ETFs have delivered for investors. Ptak compiled the daily flows and net assets of leveraged stock and bond ETFs’ over the year-long period ending 7th February 2025. Using that data, he estimated that the return of the average dollar invested in them was around 23%.

He then looked at how that compared with simply buying and holding the leveraged ETFs’ reference assets. So, for example, how would an investor have fared if they had bought a simple, unleveraged S&P 500 ETF, instead of a 2-times leveraged S&P 500 ETF? He found that, over the period, investing in the unleveraged ETFs or individual stocks would have returned around 18%, or 5% less than the return achieved through leveraging.

So is this a win for leveraged ETFs? Unfortunately not. For a start, investors in leveraged ETFs endured far greater volatility. But, more importantly, as Ptak points out, investing in these products is “largely a crap shoot”. 

“Of the 95 daily leveraged long ETFs I examined,” he writes, “nearly half had a dollar-weighted return that fell shy of the return of the index or stock to which they were tied. This means investors appear to have accrued little benefit from the leverage they paid extra to get in the first place.

What’s more, adds Ptak, fees and charges for leveraged ETFs are many times higher than they are for conventional ETFs.

Most investors should avoid them

Investors, he concludes, should avoid trading ‘daily’ leveraged stock and bond ETFs altogether. “As the name suggests,” he writes, “they’re meant to be held for a single day, a time horizon far too short to allow for anything other than speculation. 

“Even over a one-day interval, these ETFs appeared not to fully capture the leveraged return of the indexes and stocks they reference, and that got even worse as the holding period got longer. This seems to call their utility as short-term trading vehicles into question, too — not that it’s advisable to use them that way to begin with.”

Of course, it’s well documented that individual investors struggle to compete with professional investors and big institutions. But do the pros fare any better with leveraged ETFs than individuals? The evidence suggests they don’t.

A 2021 study showed that the more use U.S. institutions made of leveraged ETFs, the worse they performed. The authors concluded: “Institutions in aggregate do not benefit from exposure to l(them). Rather, these instruments appear to be used by institutions prone to poor market timing.”

Good for providers, bad for investors

So what are the lessons for investors? The main one is that, as Jeffrey Ptak says, most investors should avoid leveraged ETFs altogether. 

They are extremely risky, especially if you hold them for more than a day. They’re also complex, which adds to the risk you take if you don’t fully understand them.

Leveraged single-name ETFs in particular are the most extreme example of the fund management industry’s headlong rush into increasingly, esoteric and largely pointless, active ETFs.

As Robin Wigglesworth wrote about them in the FT: “It’s tempting to call this phenomenon financial masturbation, but self-pleasure is cost-free and has rarely harmed anyone. Leveraged single-name ETFs incinerate investor money, make markets more volatile and are solely created to generate fees for the sponsor.” That’s hardly a ringing endorsement.

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