Leveraged ETFs: Double is not always better

The concept behind leveraged ETFs is as simple as it is tempting: whoever is convinced that markets are on the rise buys not the index, but double or triple its movement. But after purchasing a leveraged ETF, many investors find themselves faced with an outcome they can’t explain. That’s because double-leveraged products do not deliver double the index return, but rather twice the daily performance. Whoever overlooks that can lose money even though his or her market forecast proved correct.

Triple return, at least for a day

Public interest in leveraged ETFs has increased considerably in recent years. The ProShares triple-leveraged ETF on the Nasdaq 100 index alone boasts more than USD 35 billion of assets under management, making it the largest of its kind. Over 1,000 new ETFs have already been launched this year – more than a quarter of them were leveraged products. The structural design of such products is simple in essence: a leveraged ETF doesn’t just hold an underlying asset, but instead builds up additional market exposure via swaps and futures. The products are advertised as offering double or triple daily returns, which basically works for a single trading session. The mechanism behind them is buried in the fine print: every evening, the leverage is reset to its target ratio after the stock market closes. This means that after a good day, the ETF has to purchase additional exposure and, conversely, after a bad day it has to reduce exposure. Put simply, it buys when prices have risen and sells when they have fallen, not due to a mistake, but as a result of the ETF’s design.

Products of this kind were long a niche offering for broad indices like the Nasdaq 100. Today, though, there are also leveraged products linked to single stocks like Nvidia, Tesla, and SK Hynix. The leverage always works for just one day. If the stock rises 2%, the double ETF gains 4%. Over a month or a year, however, this return equation no longer works out because each day builds on the outcome of the previous one. The result then often deviates substantially from the simple multiplication. This impacts the return on single stocks particularly strongly. An individual stock normally fluctuates much more volatilely than a broad index does because corporate news flow and quarterly figures regularly cause upward and downward jumps in share prices. The more the underlying fluctuates, the more the daily reset hurts the long-term return.

The perils of volatility

This becomes particularly clear through the following example. Suppose an index drops 10% on one day and then advances 11.1% the day after, putting it right back where it started. A triple-leveraged ETF on that index initially loses 30% and afterwards rises 33.3%, standing in the end at a level of 93.3. Although the market lost nothing, the investor books a loss of almost 7%.

This effect is known as volatility drag. If the underlying fluctuates sharply around a weak trendline, the daily reset hurts the longer-term return. The higher the volatility and leverage, the greater the harm. A leveraged ETF thus is not simply a bet on the direction of a market. It is also a bet against market fluctuations, though that is rarely explained in the wrapper’s instruction leaflet. A look at the statistics shows that this isn’t a theoretical problem: according to an analysis by Morningstar published in September 2026, 24% of all leveraged ETFs in the USA that launched over three years ago have lost more than 90% of their value in the meantime.

Two markets can exhibit the exact same return after three years. One of them posted constant growth while the other one intermittently nosedived and then rebounded. For a conventional ETF, that doesn’t matter because the outcome in the end is largely identical. For a leveraged ETF, though, the performances of the two markets can be worlds apart because the end performance of a market isn’t all that counts – it also matters how the performance unfolded day by day. But anyone who makes a market forecast usually has only the end target in mind.

The index treads water | The leverage doesn’t

Index without leverage and index double- and triple-leveraged, indexed to 100

Source: Own calculation by Kaiser Partner Privatbank

A matter for stock market regulators

How the interplay between leverage and volatile single stocks looks in an extreme case was vividly illustrated this summer in South Korea. Hundreds of thousands of investors bought double-leveraged ETFs on South Korean semiconductor chip stocks, sometimes even on credit. The end result was margin calls and terminated securities custody accounts. In July, South Korea’s financial market supervisory authority pulled the ripcord: a temporary ban on new single-stock products was imposed, minimum margin requirements for individual private investors were raised, and anyone who wants to continue trading leveraged ETFs now must first attend a risk management course.

How far regulation should go is being discussed also in the USA. Triple-leveraged products on broad indices and individual sectors have been available there for years. The controversy in the USA is a different one: it concerns single stocks with more than double leverage, as well as leverage factors of four or five, for which leveraged product providers have recently filed permit applications for ETFs on single technology stocks and on cryptocurrencies. In December 2025, the US Securities and Exchange Commission informed leveraged product providers that it was pausing its review of proposals for products of that kind for the time being.

For this reason, attempts are being made in the meantime to increase the frequency of leverage resets. In late summer of 2026, a provider filed an application for the approval of a product with multiple leverage resets per day rather than heretofore just one at the end of the day. Proponents view this as an innovation, but critics see it as a circumvention of a red line that was drawn for a good reason.

The debate in Europe has been defused for now because leveraged UCITS funds are de facto limited to double leverage. Anyone who wants more leverage has to go the debt securities route and thus increases issuer risk.

When the leverage works

So much for the drawbacks. However, the same mechanism that destroys asset value in volatile markets can point in the other direction in consistent growth markets. If a market rises serenely over a lengthy period, the leverage pays off. This can be calculated just as easily as in the reverse case. If an index rises 1% each day for 20 days in a row, at the end of that period it is up 22%. At the same time, a triple-leveraged product on the index gains not 66%, but 81%. The result accordingly can even exceed the actual leverage multiplication – the daily reset turns from foe into friend.

Someone who buys leveraged ETFs isn’t necessarily acting naively. Whoever would like to bet on a near-term rise in the price of a stock or index can take on exposure to double or triple the market risk via products of that kind without having to open a margin account or take out a loan. Moreover, someone who buys an ETF without borrowing additional credit cannot lose more than the amount invested in principle – the position itself cannot trigger a call for additional cover. Leveraged ETFs can definitely make sense for a brief holding period, provided that the investor understands the instrument and monitors the position accordingly.

Both sides of the leverage | From friend to foe and back

Nasdaq 100 and triple-leveraged ETP on Nasdaq 100, indexed to 100 as of Jan. 1, 2021

Source: Bloomberg, Kaiser Partner Privatbank

What investors should keep in mind

Leveraged products are not a suitable long-term substitute for conventional ETFs. Any investor who holds them for longer deviates from the underlying logic of a leveraged product. That doesn’t necessarily have to turn out badly, but it’s not what the instrument was designed for.

Leveraged products certainly have a function as a tactical tool. They definitely can be lucrative for those investors who want to play their near-term views, who monitor their positions daily, and who are able to cope with a potential total loss. Whoever, on the other hand, wishes to bear more market risk over the long term is usually better off with a Lombard loan. The leverage then belongs to the portfolio and not to the product. It can be managed there without having to reinvent itself every evening.