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Leveraged exchange-traded funds, which employ derivatives to generate a multiple of a reference asset’s daily return, have been popular. We estimate they gathered around $13 billion in net inflows from investors over the year ended Jan. 31, 2025. As of that date, leveraged ETFs held roughly $134 billion in aggregate, up 51% year over year.
How have these ETFs worked for investors? To assess that, I compiled “daily” leveraged stock and bond ETFs’ daily flows and net assets and used that data to estimate the return of the average dollar invested in them. That estimate accounts not just for the ETFs’ reported returns but also for the timing and magnitude of investors’ purchases and sales.
I estimate the average dollar earned around 23% over the year ended Feb. 7, 2025. That falls about 1 percentage point shy of the ETFs’ aggregate time-weighted (that is, buy-and-hold) return over that period. Thus, investors appear to have captured most of the ETFs’ reported returns.
Daily Leveraged Stock and Bond ETFs: Comparing Dollar-weighted and Total Returns
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MIA: Leverage
It’s also worth considering how that dollar-weighted return compares with the return investors might have obtained in a hypothetical scenario in which they bought and held the leveraged ETFs’ reference assets. For instance, in the case of a 2-times leveraged S&P 500 ETF, the investor would instead purchase an unleveraged ETF that tracked the S&P 500 or, with respect to a 3-times leveraged Nvidia NVDA ETF, would hold the stock itself, and so forth.
When I ran those numbers, I found that an investor could have earned a roughly 18% return by investing directly in unleveraged ETFs tracking the same reference indexes or by purchasing the stocks. This means that the average dollar that investors put to work in daily leveraged stock and bond ETFs earned only 5 percentage points more than could have been earned by conventional ETFs or the individual stocks concerned, while enduring much greater volatility along the way.
Daily Leveraged Stock and Bond ETFs: Comparing Dollar-wgtd., Total, and Hypo Unleveraged Returns
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True, that’s 5 percentage points more than investors would have made had they invested the conventional way. But that outcome was largely a crap shoot: Of the 95 daily leveraged long ETFs I examined, 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.
(How much extra did investors pay? Ballpark, I estimate they paid more than $900 million in expenses over the year ended Feb. 7, 2025, or around 0.95% of average net assets. Had they invested directly in the reference assets, they’d have paid a fraction of that amount.)
Counterpoint
Defenders of these products are quick to point out that they shouldn’t be evaluated over periods longer than a day, as they’ve been built to generate a specified multiple of a single day’s returns, not compound over multiple days. For instance, here’s a warning you’d find on the first page of the prospectus for one of the largest daily leveraged stock ETFs:
“If the Fund is successful in meeting its investment objective, it should gain approximately three times as much as the Index when the Index rises on a given day. Conversely, it should lose approximately three times as much as the Index when the Index falls on a given day. The Fund does not seek to achieve three times…the daily performance of the Index…for any period other than a day.”
Accordingly, I compared the average single-day return of all daily leveraged stock and bond ETFs to the average leveraged return of the indexes and individual stocks those ETFs referenced on those days. Based on that comparison, I derived the ETFs’ average upside capture on days the average leveraged reference return was positive and their average downside capture on days it was negative. Importantly, this measure treats each day’s performance as an independent event.
I found that, on average, the ETFs captured around 80% of the upside and 73% of the downside on the 251 trading days that spanned the year ended Feb. 7, 2025. Thus, even when I shrank the measurement interval to a single day to align with the way these products are supposed to work, they still didn’t seem to fully capture the reference assets’ leveraged return.
Though these products aren’t meant to be held for multiday periods, we can still measure how much of the upside and downside they captured using their arithmetic returns over such intervals. To that end, I derived the ETFs’ rolling five- and 20-day average arithmetic returns and compared them in the same way to the average arithmetic leveraged return of the reference assets.
Daily Leveraged Stock and Bond ETFs: Avg. Rolling Up and Down Capture Ratios, by Various Intervals
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I found these ETFs’ upside-capture ratios deteriorated as you elongated the holding period while their downside-capture ratios rose.
Investor Takeaways
Investors should avoid “daily” leveraged stock and bond ETFs. As the name suggests, they’re meant to be held for a single day, a time horizon far too short to allow for anything other than speculation.
Those enamored with these ETFs’ sometimes eye-popping performance over periods longer than a day should consider the return they might have earned had they directly purchased the underlying index or stock and held on to it. In a number of instances, they’d have fared almost as well, if not better, going that route, while avoiding the high fees that leveraged ETFs levy and the breakneck volatility that’s a part of the deal.
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.
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I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
