Leveraged and Inverse ETFs | ProShares (2024)

FAQs

Can you lose more money than you invested in a leveraged ETF? ›

In other words, you could potentially be liable for more than you invested because you bought the position on leverage. But can a leveraged ETF go negative? No. If you own a leveraged ETF you can't lose more than your initial investment amount.

Bottom Line on Leveraged ETFs

Leveraged ETFs decay due to the compounding effect of daily returns, volatility of the market and the cost of leverage. The volatility drag of leveraged ETFs means that losses in the ETF can be magnified over time and they are not suitable for long-term investments.

Over the long-term, inverse ETFs with high levels of leverage, i.e., the funds that deliver three times the opposite returns, tend to converge to zero (Carver 2009 ).

If you buy an inverse ETF and the market associated with your fund rises, you will lose money. If the fund is leveraged, you could experience dramatic losses. Market downturns and bear markets are entirely different than rising markets.

Since they maintain a fixed level of leverage, 3x ETFs eventually face complete collapse if the underlying index declines more than 33% on a single day. Even if none of these potential disasters occur, 3x ETFs have high fees that add up to significant losses in the long run.

This longer-term underperformance results from ill-timed rebalancing and the geometric nature of returns compounding. The author uses the concept of a growth-optimized portfolio to show that highly levered ETFs (3x and inverse ETFs) are likely to converge to zero over longer time horizons.

For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.

Inverse ETFs have a one-day holding period. If an investor wants to hold the inverse ETF for longer than one day, the inverse ETF must undergo an almost daily operation called rebalancing. Inverse ETFs can be used to hedge a portfolio against market declines.

The triple leverage can significantly magnify losses, making TQQQ a high-risk, high-reward option. The compounding of daily returns can also lead to tracking error, causing its performance to deviate from three times the index's returns over time.

Even in range-bound markets, leveraged and inverse ETFs eat away at long-term returns because the moves are asymmetrical. Because the moves are magnified, the declines from higher levels are compounded, and the rebounds don't get investors back to par because it takes more of a rally to make up the losses.

Can an ETF lose all its value? ›

"Leveraged and inverse funds generally aren't meant to be held for longer than a day, and some types of leveraged and inverse ETFs tend to lose the majority of their value over time," Doak explained.

Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.

By borrowing money from a broker, investors can trade larger positions in a currency. As a result, leverage magnifies the returns from favorable movements in a currency's exchange rate. However, leverage is a double-edged sword, meaning it can also magnify losses.

The most an investor can lose in a Leverage Shares ETP is the entire value of their initial investment plus any reinvested dividends. Who provides margin to Leverage Shares ETPs? Interactive Brokers is the clearing broker for Leverage Shares Exchange Traded Products (ETPs).

For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.

The two major risks associated with leveraged ETFs are decay and high volatility. High volatility translates to high risk. Decay emanates from holding the ETFs for long periods.