Leveraged Exchange-Traded Funds (ETFs) seek to amplify the daily return of an index or a single stock, typically by a factor of 2x or 3x.
These products have become popular on Wall Street with over 700 leveraged equity ETFs now available.
Utilizing leveraged ETFs in a long-term portfolio leads to underperformance and excessive risk.
“Whenever a really bright person who has a lot of money goes broke, it’s because of leverage.” – Warren Buffet
What are Leveraged ETFs?
Leveraged ETFs are investment vehicles that seek to augment the daily performance of an index or single stock by a certain factor through the use of derivatives and leverage to achieve daily results. These investment vehicles have gained popularity given increased accessibility, market speculation, and social media hype.
Leveraged ETFs seek to amplify the return profile of the underlying investment such as by 2x or 3x. Three issuers of these ETFs recently began the process of offering 5x leveraged ETFs.
As of October 2025, there are over 700 leveraged equity ETFs in the United States [1]. The vast majority of those launched in 2025 are in the information technology sector [2].
How do Leveraged ETFs Operate?
Leveraged ETFs utilize debt and derivatives to attempt to magnify the daily performance of their underlying index. While the leverage can serve to magnify returns when the index is up, it also magnifies losses when the index is down. To demonstrate this, we compare the hypothetical daily performance of a 3x leveraged ETF to that of the underlying index.
Why Do Levered ETFs Underperform Over Long Time Periods?
Leveraged ETFs tend to underperform over long time periods for several reasons, including volatility drag, interest costs, and fund management fees.
Volatility Drag
Leveraged ETFs suffer from volatllity drag primarily as a result of daily rebalancing and the compounding of returns. Higher volatility rates have a substantial drag on leveraged ETFs returns. Leveraged ETFs must also adjust their holdings on a daily basis to maintain leverage ratios, which leads to selling low and buying high.
To illustrate this concept, here is a hypothetical scenario comparing the cumulative performance of a 3x leveraged ETF to its underlying index assuming substantial downside and upside volatility.
Despite the index remaining unchanged after six days, the leveraged ETF significantly underperforms in this example.
Interest Costs
There is a financial cost of leverage, as deriatives and borrowing are used to create the ETFs embedded leverage. The cost of financing creates a substantial drag on returns over long time periods, contributing to leveraged ETF’s underperformance.
Fees
The operational costs of managing a leveraged ETF are high. Most commonly referred to as the fund’s expense ratio, the costs are netted from performance and result in lower returns. While net expense ratios vary, the operational costs of a leveraged ETF typically range from 1.0% - 1.5% a year. Low-cost non-leveraged index ETFs typically have net expense ratios of less than 0.25%.
Conclusion
Despite the increasing popularity of leveraged ETFs, we do not view them to be suitable or advantageous in client portfolio construction. The embedded risks of leveraged ETFs are substantial, and we do not believe the financial community outlines these risks appropriately. We believe investors utilizing leveraged ETFs as part of their long-term investment plan need to seriously reconsider their investment selection.
Footnotes
[1] BofA Global Investment Strategy and EPFR
[2] Bloomberg LP, VettaFi LLC
Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information. This article is for education purposes and should not be treated as tax or legal advice. This article is not a substitute for legal or tax advice from your professional legal or tax advisor.