Leveraged ETFs have recently faced criticism, being labeled as a significant risk in the financial markets. Despite making up 34% of new ETF launches and receiving substantial media attention, they account for only 1% of total ETF assets and an even smaller fraction of the U.S. equity markets. While these financial instruments are inherently risky and subject to volatility drag, they are generally well-understood by traders who engage with them, as evidenced by their high volume-to-assets under management ratio.
These ETFs are likened to fast food and whiskey—legal and capable of delivering desired outcomes, but with inherent risks that must be acknowledged. Despite their controversial nature, leveraged ETFs continue to perform effectively in tracking their benchmarks on a day-to-day basis, provided users are aware of the potential pitfalls.
Leveraged ETFs: High Launch Rate but Minimal Market Impact
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