POPULAR LEVERAGED FUNDS SHOCK INVESTORS WITH HUGE LOSSES / THE WALL STREET JOURNAL

Popular Leveraged Funds Shock Investors With Huge Losses

Some funds offering to double single-stock moves have veered sharply off course from the shares they track

By Jack Pitcher

Emil Lendof/WSJ, iStock

Risky leveraged exchange-traded funds are booming. 

Their performance over the past year highlights their pitfalls.

The funds, accessible to anyone through most brokerage accounts, use derivative contracts or borrowed money to amplify the return of an underlying asset. 

Leveraged funds tracking stock indexes have been around for more than a decade. 

Their bolder cousin, the leveraged single-stock ETF, was first approved by U.S. regulators in 2022. 

Those single-stock funds have grown rapidly in number, and gained a following among individual investors who yearn for even bigger returns than what a record-setting stock-market rally has offered. 

By mid-October, leveraged single-stock ETFs had accumulated some $40 billion in assets, according to VettaFi data.

While some large managers such as BlackRock and J.P. Morgan Asset Management have avoided these ETFs given their risks, many others have been drawn to the category for the thick management fees they provide. 

Leveraged ETFs typically collect about 1% on the assets they manage, well above the 0.3% fee averaged by active funds. 

Roughly 200 leveraged equity ETFs have been launched in 2025 alone, bringing the total number to 701 funds in October, according to Bank of America analysts.

Their surging popularity has exposed more investors to steep losses, particularly among those investors who misunderstood how leveraged funds work.

The most common type of leveraged fund offers to double the return of a reference asset on a daily basis. 

So a 2x leveraged ETF tracking Tesla shares would rise 10% on a day the stock climbs 5%. 

But the same fund also amplifies losses; if Tesla were to fall 5%, the leveraged ETF would post a decline of 10%.

Over time, those amplified gains and losses can pile up in hurry, and veer from the returns produced by the underlying stock.  

One of the most popular funds provides an extreme example. Last November, two recently launched ETFs that offered to double the daily returns of bitcoin-linked stock MicroStrategy (now known as Strategy), began to soar. The outsize gains attracted attention on social media, and thrill-seeking individual investors began to pile in at a pace never seen before for a leveraged single-stock fund. 

Many of those investors are now sitting on huge losses, despite the fact that the underlying Strategy shares are up over the past year. 

Strategy shares rose 28% in the 12 months ended Wednesday, while one of the leveraged funds, the Defiance Daily Target 2x Long MSTR ETF, plunged 65%. 

The brutal divergence in performance is caused by what traders call “volatility decay,” or the tendency of price fluctuations to erode the long-term returns of a leveraged fund, even if the underlying asset goes up. 

And it is why leveraged-fund managers are quick to warn that their funds shouldn’t be held for long periods.

“Everything that is problematic about these funds is more problematic the more leverage or volatility you add to them,” said Dave Nadig, an industry veteran and director of research at ETF.com. 

Money managers say that most leveraged funds aim to amplify returns for a single day, and shouldn’t be held for longer periods.

Take a hypothetical stock and a 2x daily leveraged ETF that tracks it, for example. 

Imagine both the stock and the leveraged fund begin the week with a share price of $10. 

If the shares fall 30% on Monday, the 2x ETF tracking them will fall 60% to close at $4. 

If the stock roars back with a 50% gain on Tuesday, it is now up on the week, trading at $10.50. 

But even though the 2x ETF would have doubled the shares’ Tuesday performance, rising 100%, the ETF is only back to $8, and is now trailing its underlying asset on the week.

The more volatile the asset, the more the leveraged ETF can diverge from its performance. 

And the harder it is for investors to climb back from steep losses. 

“Are we MSTU and MSTX holders screwed beyond recovery?” one user on a Reddit investing forum asked, referencing the tickers of the two MicroStrategy funds. 

“If I did not understand price decay before, I do now.”

“I learned my lesson and don’t plan on playing leveraged ETFs again,” one of the thousands of other posters discussing the funds wrote.

Some sophisticated investors have profited from the funds’ poor performance. 

In a letter to investors earlier this year, hedge-fund manager David Einhorn said he had been shorting the leveraged MicroStrategy ETFs in a trade that was “a material winner.” 

“These products are destined to fail,” Einhorn wrote. 

“Over time, they are likely to bleed out their capital.”

After plowing billions into leveraged single-stock funds in 2024, some investors have soured on them in recent months. 

Traders pulled almost $5 billion from the fund category over the past two quarters, according to Morningstar, the first time the fund category has ever reported outflows.

Money managers haven’t been deterred. 

Some have continued to launch leveraged ETFs, seeking to capitalize on investors emboldened by the market’s recent rally.

Last week, ETF issuer Volatility Shares filed paperwork to launch 27 highly leveraged ETFs, including what would be the first 5x funds in the U.S. 

Such funds would go to zero and be liquidated in the event their underlying stock falls 20% in one day.

The Securities and Exchange Commission has voiced opposition to such highly levered funds in the past and could block them from being launched. 

If the regulator doesn’t take action—it currently isn’t reviewing fund applications during the government shutdown—the funds will be free to launch 75 days after their application date, analysts said.