Leveraged ETFs: A Most Unsatisfactory Diversion

One is, frankly, exhausted by the sheer number of financial instruments presented to the public as shortcuts to prosperity. These Leveraged ETFs, you see, promise a rather dazzling doubling of exposure without the vulgarity of actually, well, borrowing. It’s a clever conceit, certainly. But, as with most clever conceits, one suspects a rather nasty reckoning is just around the corner. Hold on to your hats, as they say – though, frankly, one prefers a well-made cloche.

The truly sensible course, naturally, is to simply buy and hold decent stocks. A bit pedestrian, perhaps, but undeniably effective. These leveraged contraptions are, at best, a frivolous distraction. A rather expensive one, at that. One imagines the marketing chaps are having a perfectly ripping time, though. Preying on the anxieties of the insufficiently informed is, sadly, a time-honored profession.

Leveraged ETFs: A Familiar Sort of Trouble

The enthusiasts, bless their optimistic hearts, view these ETFs as a way to multiply gains without resorting to the unpleasantness of debt. One doesn’t need margin, they chirp. Quite. But one acquires a remarkably similar level of risk. It’s a bit like insisting one is traveling by hot air balloon rather than plummeting from an airplane. The destination, ultimately, is much the same.

Take, for instance, the ProShares Ultra NVDA ETF. A rather clumsy name, if you ask me. It promises to double any movement in Nvidia’s stock. If Nvidia rises by a modest 1%, the ETF, theoretically, leaps by 2%. A 20% rally for Nvidia translates into a rather impressive 40% gain for the fund. It sounds positively thrilling, doesn’t it? Until, of course, it doesn’t.

Nvidia, being a stock subject to the whims of the market, is perfectly capable of falling by 20% without any catastrophic failure of its underlying business. A slight chill in macroeconomic conditions, a particularly gloomy analyst’s report… perfectly sufficient to send the shares tumbling. And if that happens, the ProShares fund doesn’t merely fall by 20%. It plummets by 40%. A most unpleasant surprise, I assure you.

It’s precisely the same principle as margin, only disguised with a rather more complicated mechanism. Your money can grow or shrink at a truly alarming rate. And frankly, that sort of speculation is best left to those with a surplus of both funds and foolishness.

The Devil, As Always, Is in the Details

With margin, one worries primarily about interest rates and avoiding a dreaded margin call. Tiresome, certainly, but relatively straightforward. There are, thankfully, more civilized ways to build a portfolio. Investing in solid, unexciting companies, perhaps. Or, dare one suggest, actually earning a living.

But Leveraged ETFs compound the problem. Firstly, they come with eye-watering expense ratios. The ProShares Nvidia ETF, for example, levies a 0.95% annual fee. An absolute scandal, if you ask me. Nearly a full percentage point surrendered to the fund managers for the privilege of losing money faster.

Compare that to the Vanguard S&P 500 ETF, which charges a mere 0.03%. A pittance, really. One almost feels guilty for not investing more.

And that’s not even the worst of it. These ETFs suffer from a particularly insidious affliction known as “decay risk.” Due to their daily rebalancing, they essentially erode your capital over time. They reset daily to maintain their leverage ratio. If the underlying asset drops by 10%, a 2x leveraged ETF drops by 20%. But the fund manager, to maintain the 2x leverage, must sell stocks. It’s a rather vicious cycle, really.

Consider this: a 2x leveraged ETF has $100 in assets and $200 in exposure. A 10% drop in the stock leaves a regular investor with $90. But the same drop for the 2x leveraged ETF results in a $40 loss, reducing it to $60 in assets and $160 in exposure. The fund then must sell $40 at a loss to maintain the 2x exposure, leaving it with $60 in assets and $120 in exposure. This happens every day, slowly but surely diminishing your returns.

To recover to breakeven, the underlying stock needs to gain 11.1%. But the fund requires a whopping 66.6% gain to reclaim its original price. That’s the hidden cost of these leveraged instruments. It’s rather like trying to climb Mount Everest with a sprained ankle.

The longer you hold these funds, the worse the decay becomes. Investing in solid stocks for the long term, while admittedly lacking in excitement, is a far more sensible strategy. One might even say, a civilized one.

2026-02-19 06:53

Leveraged ETFs: A Familiar Sort of Trouble

The Devil, As Always, Is in the Details

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