Leveraged ETFs offer higher potential returns and higher potential losses
They're not designed to be long-term investments and are more expensive than regular ETFs
Many leveraged ETFs have negative returns
Leveraged investing (or geared investing) is a way to step up your potential gains at the expense of higher risk. In the simplest terms, leveraged ETFs multiply your exposure to a certain stock index (such as the S&P 500).
If the index goes up, your gains are magnified. If it goes down, your losses are magnified.
It's a higher reward, higher risk form of ETF investing.
But leveraged ETFs are also more complicated than they first appear. They're not normally something you hold long-term and, as a result, are best-suited to experienced investors and active traders.
Best leveraged ETFs in 2024
Here's a list of the top 5 leveraged ETFs based on NAV returns (net asset value) so far this year. This list is based on TradingView data from 16 August 20241:
Capital INV Trust Corp Capital TAIEK DLY 2X TWD (TWSE: 00685L) - 44.34%
Global X BetaPro S&P/TSX CPD EGY 2X DL BL ET ETF SHS (Post Rev Split) (TSX: HEU): - 39.48%
How to invest in leveraged ETFs
Find a trading platform. Leveraged ETFs are specialised investment products and won't necessarily be available on all trading platforms. Make sure you confirm what ETFs are available on a certain platform before signing up.
Open an account. Once you've chosen a platform, sign up for an account and verify your identity to begin trading.
Add funds. You'll need to deposit money into your account to begin trading. Most platforms support deposits via bank transfer or card.
Buy the ETF. Search for the relevant ETF using its ticker code or name.
Track its performance. Leveraged ETFs aren't meant to be long-term investments, so you'll need to monitor their performance and be ready to sell.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
How does a leveraged ETF actually work?
Leveraged ETFs (exchange-traded funds) let you increase your exposure to a certain stock index or sector (such as the S&P 500) without having to increase your capital.
They do this by employing derivative instruments like swaps and futures contracts to leverage your exposure by a certain factor (typically 1.5x to 3x).
For example, say you invest in a leveraged ETF that tracks the S&P 500 index by a factor of 3.
If the S&P 500 goes up 5%, your return is an impressive 15% before fees (5% x 3). If it drops 5%, your return is actually an alarming -15%.
They also have much higher costs than regular ETFs. An expense ratio of around 1% is average for a leveraged ETF, while regular ETFs can be as low as 0.03%.
The risks of leveraged ETFs
As we've already mentioned, the key risk of leveraged ETFs is that they will amplify your losses as well as your gains.
Unlike regular ETFs, leveraged ETFs are also not intended as long-term investments and are actually rebalanced every day.
In fact, many leveraged ETFs are designed around targeting a return over a specific period of time, often a single trading day.
Keeping these ETFs for longer than the intended holding period could lead to a lot more volatility and potentially amplify any losses.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involve substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Consider your own circumstances and obtain your own advice before making any trades.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Tom Stelzer is a publisher and writer for Finder, covering investing and cryptocurrency.
He previously worked for Finder as a writer in Australia and the UK, covering things like personal finance, loans, investing, insurance as well as small business and business loans.
He has a Master of Media Arts and Production and Bachelor of Communications in Journalism from the University of Technology Sydney. See full bio
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