By Ian Salisbury
So-called leveraged exchange-traded funds offer a tantalizing prospect -- to double, or sometimes triple, stock market moves. So far this year, they are largely delivering. But their complicated mechanics make these funds unreliable for long-term investors.
Leveraged ETFs are one of the most popular and controversial corners of the ETF industry. The funds employ derivatives to give investors a convenient way to make magnified bets on an index like the S&P 500, a sector such as technology or oil, or even a single stock, such as Tesla or Netflix. Recently leveraged ETF launches have been on the rise.
Basic leveraged funds promise to deliver 2x or 3x returns of the target's price change -- over a single day, or sometimes a single month. Other funds promise inverse returns, rising 2x or 3x the amount the market declines on a particular day. Major leveraged fund brands include ProShares, Direxion, Tradr and GraniteShares.
The funds' daily time frame is key, since over longer periods the funds' performance tends to deviate dramatically from the index or stocks they target. The effect tends to be worse in volatile markets, which can lead to both bearish and bullish funds in the red at the same time.
"Leveraged ETFs...are designed to deliver some multiple of the underlying stock or index return on a daily basis. Not for a week, not for a month -- for one day," noted Kailash Capital Research in a note this month. "At the end of each day, the ETF 'starts over' and delivers a multiple of whatever happens to the price of the stock the next day...you have essentially zero probability of earning 2X or 3X what the stock did over any period other than one day."
The point, which fund companies are often at pains to explain to fundholders, is that the leveraged and inverse ETFs are for short-term hedging and tactical bets, not for doubling down on market outcomes. That said, most investors, even those looking for short-term hedges, aren't necessarily operating over periods that last precisely 24 hours. It's widely assumed many fund investors use these ETFs off-label, hoping for results over longer periods.
So far in 2026, that would have worked fairly well, at least for funds targeting broad market indexes.
Year to date, the S&P 500 is down 4.6% through Friday, thanks to turmoil in the Middle East. The ProShares Ultra S&P 500 ETF, which promises 2x daily returns of the index, is down 10.5%, according to Morningstar. ProShares' 3x version of the fund is down 16%.
By contrast, ProShares 2X short fund is up 11.3% and its 3x short fund is up 16.7%.
That said, how the funds perform from here, will depend on how volatile the market is and the unique path of ups and downs it takes to get to its final destination.
The ProShares funds' Statement of Additional Information, a regulatory filing for potential fundholders, lays out some of the possible scenarios. Assuming the S&P 500 gained 10% over the course of a year, a fund that targeted 2x daily returns of the index could end with a gain of 21% in a scenario with zero volatility throughout the year, according to the document. However, if the index's volatility was 50%, it would deliver a loss of 6%.
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 23, 2026 13:32 ET (17:32 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
