Leveraged ETFs promise big rewards, but the risk may outweigh them. If you’re looking to include leveraged ETFs in your investment portfolio, it’s a good idea to approach them with caution.
Best-performing leveraged ETFs
Here are some of the best-performing leveraged equity ETFs. Note, as with any investment, those performing well today may not be performing well tomorrow.
Leveraged ETF definition
A leveraged ETF is an exchange-traded fund that tracks an existing index, but rather than match that index’s returns, it aims to increase them by two or three times.
For example, say you had a traditional ETF that tracked the S&P 500 index. If the S&P 500 increased in value by 1%, your ETF would likely also increase by about 1% because it holds most of the same companies the index tracks.
But if you had a leveraged S&P 500 ETF, that 1% gain could be magnified and instead be a 2% or 3% gain. While that’s great if the market is going up, it’s not so great if the market is going down. If the S&P 500 lost 1%, you could lose 2% or 3%.
How do leveraged ETFs work?
So, how do leveraged ETFs achieve those impressive returns (or magnified losses)? Leveraged ETFs borrow money — typically from a bank or investment firm — and invest that money into contract investments, such as futures or options. These types of investments are highly speculative and can pay out big. But they can also lose big.
If the leveraged ETF you’re investing in is using a high-risk strategy, it’s possible that your losses could exceed the amount you invested.
By contrast, if you invest in a traditional ETF, you won’t lose more than the amount you invested — and losing that entire investment is relatively rare with traditional ETFs.
Leveraged ETFs are very risky and should be approached with caution.
Leveraged ETF expenses
Leveraged ETFs tend to have much more expensive fees than traditional ETFs. Leveraged ETF expense ratios can float around 0.95%. That’s a high price tag compared to most passive ETFs, which can have expense ratios as low as 0.10% or 0.20%.
Leveraged ETFs may also charge interest and transaction fees, which can reduce your overall return.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.