Leveraged ETFs: Big Index Gains, Higher Hurdles for Single Stocks

Leveraged exchange-traded funds make borrowing-like exposure available through an ordinary exchange-traded product. Investors can seek twice or three times a benchmark’s daily return without arranging financing or managing derivatives themselves. But convenience does not remove the costs of leverage.

In their preprint, The Costs and Benefits of Leveraged ETFs, Chris Murray and Marco Sammon examine how those costs interact with product launches and investor trading. Their central finding is not that leveraged ETFs are uniformly beneficial or harmful. Historical outcomes differed sharply across the assets being tracked.

Large gains, with an important benchmark distinction

The researchers study daily-reset leveraged and inverse exchange-traded funds and notes from 2006 through September 2025. Products had to reach at least $30 million in assets in one calendar month. The sample excludes weekly- and monthly-reset products and funds using options as their primary method of targeting leverage.

Long leveraged equity-index ETFs generated an estimated $117.8 billion in aggregate investor gains. This measure sums each day’s fund return multiplied by the assets invested at the beginning of that day; it is not a representative investor’s percentage return.

For a smaller sample with matched underlying-return data, equity-index products generated $107.6 billion, compared with $61.1 billion in a simulated unlevered investment. That is an advantage of about $46.5 billion.

The comparison adds the same dollar inflows to the underlying investment at the same times. For withdrawals, it applies the same percentage redemption as in the leveraged fund, rather than withdrawing identical dollar amounts from accounts whose values have diverged.

Single-stock leveraged ETFs also produced positive gains in the matched sample: $13.1 billion against $11.7 billion for the underlying stocks. Their advantage was much smaller. The evidence therefore does not show that single-stock products universally lost money; it shows that strong underlying returns translated into relatively little additional aggregate gain from leverage.

Why twice daily is not twice annually

A daily leverage objective is not a promise to multiply a benchmark’s annual return. Daily returns compound, and larger fluctuations create a growing shortfall relative to the leverage multiple times the underlying asset’s cumulative log return.

The paper illustrates this with an asset rising from $100 to $105 and then returning to $100. Before fees and financing costs, a twice-leveraged fund gains 10% and then loses about 9.52%, leaving it approximately 0.48% down despite the underlying asset finishing unchanged.

The authors emphasize that volatility drag comes from compounding leveraged returns, not simply from resetting exposure every day. Trending markets can also produce favorable compounding: leverage does not mechanically imply losses.

Their calculations show how volatility raises the return needed to match an unlevered investment. With daily underlying volatility of 5%, a twice-leveraged fund requires an annual underlying return of roughly 98.4% to break even against the underlying asset. That illustration assumes a 4% risk-free rate, a 1% expense ratio and a 0.5% financing spread; it is not a universal threshold.

Financing adds another distinction. Estimated annual funding spreads above the risk-free rate were below 1% for equity-index products, but between 6.8% and 9.8% for twice-leveraged single-stock products, depending on weighting. These spreads are inferred from return shortfalls after accounting for stated leverage, risk-free financing and management fees, rather than directly observed borrowing charges.

Products built around volatile winners

Among qualifying launches in the paper’s launch-characteristics analysis, the median underlying stock ranked near the 94th percentile for volatility and the 92nd percentile for past-six-month returns, relative to the largest 1,000 stocks by market capitalization.

More volatile underlying stocks were also associated with larger fund assets after controlling for company size and fund age. The authors interpret these patterns, alongside evidence of relatively intensive retail trading, as consistent with sponsors catering to demand for lottery-like payoffs. Those associations do not independently establish investors’ motives.

Trading did not reliably overcome the hurdles

Long leveraged-fund flows generally increased after recent losses and declined after gains. Unlike the return-chasing pattern in ordinary ETFs, this was contrarian behavior. But flows showed no stable positive relationship with subsequent returns. A separate decomposition found that within-fund investor timing reduced returns, especially in single-stock products.

The findings remain historical and sample-dependent. Equity markets were unusually strong, single-stock products had short histories, and the asset threshold excludes smaller products. The performance comparison omits investor-level taxes and intraday execution costs and does not test alternative leverage strategies using margin or derivatives.

The preprint’s practical distinction is therefore between accessible leverage and favorable investment economics. A clearly stated daily target does not reveal what investors will earn over a longer holding period.