Leveraged ETFs, which promise to magnify the daily return of an underlying index or stock, have more than doubled in total assets over the past two months, according to data from Goldman Sachs cited by The Wall Street Journal. There are now more of these funds listed in the United States than there are companies in the S&P 500, the Journal reported in its Markets A.M. newsletter Friday.
The growth has accelerated as single-stock leveraged funds have appeared, including one with a ticker symbol (SPCF) that will aim to deliver twice the daily performance of SpaceX’s shares once the ticker SPCX begins trading Friday. SpaceX raised $75 billion in the largest initial public offering in history, and its stock is expected to debut later today.
Even when leveraged funds perform as advertised, they often fail to deliver the full compounded return an investor might expect. The Wall Street Journal illustrated the mechanism: if an index rose 5% one day and then fell 4.76% the next day — returning to its starting level — a triple-leveraged fund that multiplies those daily changes would wind up worth about 1.4% less than the original investment, before expenses. The effect is magnified when the underlying asset is volatile, because daily rebalancing locks in losses that can compound over time.
That volatility decay has devastated some of the oldest leveraged products. The ProShares UltraPro Short QQQ, which seeks to deliver three times the inverse daily return of the Nasdaq-100, and the Direxion Daily Small Cap Bear 3X Shares have each lost more than 99.9% of their aggregate value, the Journal reported. Both funds must repeatedly reverse-split their shares and issue more stock to remain listed.
Single-stock leveraged funds are especially vulnerable to sharp swings. A new South Korean fund offering an enhanced bet on chip maker SK Hynix plunged 27% on Tuesday even though SK Hynix shares rose 16% that day, the Journal reported. Another leveraged fund tied to bitcoin hoarding company Strategy has fallen 99% in just 19 months, according to the report.
Despite the risks, interest in leveraged ETFs has exploded. Of the 10 most-traded funds in the U.S. over the past month, according to ETF Database data cited by the Journal, nine were leveraged or inverse products. The huge, plain-vanilla SPY and QQQ funds — tracking the S&P 500 and Nasdaq-100 — ranked 11th and 15th, respectively.
Sponsors of leveraged ETFs say the vehicles allow ordinary investors to protect or enhance their portfolios “without fear of margin calls,” and point to each fund’s stated “daily investment objective.” But the Journal noted that sophisticated speculators can use options instead, while leveraged funds — which have a ticker symbol available to anyone with a brokerage account — attract many investors who may not fully grasp the compounding math behind the legal disclosures.
The Journal also reported that Friday’s trading session opened with stock futures pointing to a continuation of the prior day’s relief rally after President Trump’s statement about an imminent deal with Iran, and that oil prices fell another 3% to their lowest level since the early days of the war.