The Risks of Riding the Leveraged Wave: EET's Dividend Cut and the Case for Short-Term Plays

Investors in the ProShares Ultra MSCI Emerging Markets ETF (EET) face a critical crossroads. The fund's recent 3% dividend cut—from $1.93 to $1.81 annually—highlights vulnerabilities in its 2x leveraged structure, even as its stock price surged 10% in April 2025. This article examines why EET's dividend dynamics and leverage amplify risks for long-term holders, while offering a cautionary tale about the perils of compounding leverage over time.

The Dividend Cut: A Structural Warning

EET's dividend adjustment, announced on June 24, 2025, reflects broader pressures on its leveraged model. The fund aims to deliver twice the daily performance of the MSCI Emerging Markets Index, a strategy that demands constant rebalancing and exposes it to compounding decay. Even as the underlying index rose 13% year-to-date through June, EET's dividend yield fell to 2.9%, down from 3.1% in early 2024.

The cut underscores a recurring issue: leveraged ETFs like EET struggle to sustain distributions over time. Their tracking errors and fees erode returns, especially during volatile periods. For instance, EET's 10% April surge masked the fact that its cumulative return over two years trails the MSCI index by 15 percentage points due to leverage drag.

Leverage Risks: Why “Double the Exposure” Means Double the Trouble

Leveraged ETFs are inherently unsuitable for buy-and-hold strategies. EET's 2x daily rebalancing compounds both gains and losses, creating a “volatility tax.” Consider this: If the MSCI index rises 10% over a year, EET's return would theoretically hit 20%. But if the index fluctuates—say, +5% one month and -5% the next—the fund's returns would be 2x 0%, or flat, despite the index ending at breakeven. Over time, this math guarantees underperformance relative to a non-leveraged ETF tracking the same index.

The recent dividend cut amplifies this dynamic. EET's payout now depends not just on index performance but also on its ability to maintain leverage ratios amid rising expenses. The fund's expense ratio of 0.95%—high for an ETF—further drains returns, especially when paired with compounding losses during downturns.

Yield Sustainability: A Fragile Proposition

The MSCI Emerging Markets Index's strong performance in 2025—13% YTD as of June—should theoretically support EET's dividends. Yet the fund's cut reveals a disconnect: its structure prioritizes short-term leverage over long-term yield stability.

Compare EET's 2.9% trailing yield to the non-leveraged iShares MSCI Emerging Markets ETF (EEM), which offers a 2.1% yield with far less volatility. EET's higher yield comes at a cost: its tracking error versus the index has widened to 4% over the past year, meaning its returns increasingly diverge from the underlying assets.

Strategic Holding Periods: Time Is Not on Your Side

The compounding leverage effect ensures EET's suitability is fleeting. For example, an investor holding EET for a year during a 10% index gain would expect a 20% return. But due to daily rebalancing and fees, the actual return might be closer to 16%, with dividend cuts further reducing payouts. Over five years, this gap balloons into a significant underperformance.

Investors should instead treat EET as a tactical trade, with strict exit points. The fund excels in short-term bursts when the MSCI index is trending upward—like April's 10% surge—but faltering momentum can trigger sharp declines. Pairing EET with stop-loss orders or hedging strategies is essential to mitigate its inherent risks.

Investment Advice: Pragmatic Alternatives

1. Short-Term Plays Only: Deploy EET for weeks or months during clear uptrends in emerging markets, using technical signals like moving averages to time entries and exits.
2. Avoid Long-Term Holds: The compounding decay and dividend instability make EET unsuitable for retirement portfolios or income-focused strategies.
3. Consider Non-Leveraged ETFs: Funds like EEM or Vanguard's VWO offer stable exposure to emerging markets without leverage-related erosion. Their lower fees and tracking accuracy make them superior for dividend seekers.
4. Monitor Leverage Costs: Track EET's premium/discount to its net asset value (NAV). Persistent premiums above 5% signal overvaluation, while discounts may offer buying opportunities—but always with a strict time horizon.

Conclusion: The Cost of Doubling Down

EET's dividend cut is a stark reminder that leveraged ETFs are high-wire acts, not investments. While they can amplify gains in bull markets, their structural flaws make them dangerous for anything beyond short-term speculation. Investors chasing yield or growth in emerging markets are better served by non-leveraged alternatives, where returns align more closely with the underlying index—and where dividends remain sustainable.

The next ex-dividend date for EET, projected for late September 2025, offers a final chance to capitalize on its fleeting appeal. Beyond that, the risks of compounding leverage will likely outweigh the rewards.

Ask Aime: Should I still invest in the ProShares Ultra MSCI Emerging Markets ETF (EET) after its 3% dividend cut?