Billions Flowed Into New Leveraged ETFs Last Year. Now They’re in Free Fall.

BOOM! Billions flowed into new leveraged ETFs last year, and now they’re in free fall. BUY NOW! This is a no-brainer! Leveraged ETFs are designed to amplify the daily returns of an underlying index, but this design comes with significant risks that make them unsuitable for long-term investment strategies. One of the primary risks is decay risk, which occurs due to the daily resets of the ETFs. As the materials state, "Leveraged ETFs are designed to multiply the daily returns of an underlying index... Due to this, the leveraged ETF can move away from the true performance of the underlying asset over time." This means that even if the underlying index remains stable or moves favorably, the leveraged ETF can drift away from its expected performance due to the compounding effect of daily resets.

For example, consider the GraniteShares 2x Long AAPL Daily ETF (AAPB), which tracks the performance of Apple’s stock and doubles the daily returns or losses of that asset. If Apple’s stock goes up by 5% over a span of two weeks, we would expect AAPB to be at 10%. However, due to decay, the actual return could be less than 10%. This is because of daily rebalancing, where "there were days when AAPL went up by 2% and others when it fell by 2-3%. The 2x Long AAPL Daily ETF was reset after each of those days, which led to a subtle drift away from the performance of the underlying stock."

The implications for investors who hold these funds for extended periods are severe. The materials warn that "the decay incurred over a year of holding a leveraged ETF is much more noticeable (and carries more risk) than what an investor would experience in a week." This decay risk is a substantial reason why leveraged ETFs are not intended to be held for months or years on end. The longer you hold the fund beyond a couple of days or weeks, the decay risk starts to creep in, leading to an unexpected deviation from the underlying asset.

Moreover, the materials highlight that "Leveraged ETFs are primarily used for short-term trading opportunities. Investors usually hold these funds for a day or two, sometimes up to 10-14 days on the longer side." This short-term focus is crucial because the decay risk compounds over time, making long-term holding highly risky. For instance, the Direxion Daily Semiconductor Bull 3x Shares (SOXL) plunged 22.5% in a single day in August 2024, demonstrating the extreme volatility and risk associated with these funds.

In summary, the risks associated with leveraged ETFs, such as decay risk and daily resets, make them unsuitable for long-term investment strategies. Investors who hold these funds for extended periods face significant risks of decay and unexpected deviations from the underlying asset's performance, leading to potential losses. Therefore, leveraged ETFs are best suited for experienced day traders who understand these risks and can manage their positions accordingly.