Leveraged ETF Launches Leap as Investors Embrace Risk
- Leveraged funds make up nearly one-fourth of the year’s 450 or so launches, Bloomberg reported.
- Leveraged long ETFs hold a record $122 billion in assets.
- Risk worries appear to dim as markets aim for third year of double-digit gains.
Launches of leveraged ETFs are soaring, signaling that investors are shedding recession fears and taking on risk as equity markets march higher amid economic and geopolitical worries.
Exchange-traded funds that use options and other financial instruments to amplify the return of a stock or index constituted 23% of the approximately 450 year-to-date launches, the highest proportion since 2010, Bloomberg Intelligence ETF Analyst Athanasios Psarofagis wrote in a July 25 note titled “Markets Getting Frothy Again.”
So-called leveraged long funds, which bet on an asset or index’s gain, and short funds that provide returns when a stock or index fall, hold a record $122 billion in assets, Psarofagis wrote. Nearly 400 ETFs, out of the 4,500 or so listed in the U.S., use leverage, according to FactSet and etf.com.
Risk Appetite Grows
Stocks have powered through a range of challenges this year—a brief bear market, sparked by fears that President Donald Trump’s tariff and trade wars would batter growth while harming relations with allies, as well as inflation and recession concerns—and are currently on pace to deliver a third-straight year of double-digit gains. Such performance has apparently boosted investors’ confidence that markets are strong and adding risk is appropriate.
“People rushing to fish where the fish are biting,” Bloomberg Intelligence Senior ETF Analyst Eric Balchunas wrote in a July 28 X post.
Still, Balchunas cautioned in a separate post that, amid the flood of leveraged launches, many will fail: “Keep in mind a LOT of these are going straight into oblivion. Issuers flood zone, hope for one blockbuster.”
Leveraged ETFs Hard to Ignore
While the rise signals that ETFs are no longer simply a source for safe, low-volatility investing, the outperformance of many leveraged ETFs compared to broader markets make them difficult to ignore.
For example, the largest, the $27.3 billion ProShares UltraPro QQQ (TQQQ), has gained 67% over the past three months, compared with the 16% gain in the Vanguard S&P 500 ETF (VOO), the world’s biggest ETF, which tracks the S&P 500.
On the flip side, the $1.3 billion Direxion Daily Semiconductor Bear 3X Shares (SOXS), which bets on declines in semiconductor company stocks, has lost 61% while still bringing in $1.4 billion in net inflows over the past three months.
Leveraged ETFs that magnify gains in losses in single stocks have exploded in popularity, with recent launches including the T-REX 2X Long SMR Daily Target ETF (SMUP) covering NuScale Power Corp. (SMR), and the Defiance Daily Target 2X Long JPM ETF (JPX), covering JPMorgan Chase & Co. (JPM).
