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What Is a Leveraged ETF?

Key Takeaways

  • A leveraged ETF seeks a multiple — such as 2X long or -2X short for inverse exposure — of the performance of a reference security (a stock or an ETF) for a specified period of time, called the reset period.
  • Leveraged ETFs are intended to be used as short-term trading vehicles by sophisticated investors and professional traders who actively monitor and manage their positions.
  • Most leveraged ETFs reset daily. In 2024, Tradr launched the industry’s first monthly and quarterly reset leveraged ETFs, alongside its daily reset lineup.
  • Over periods longer than the reset period, returns compound and can differ significantly from the stated multiple. That means a leveraged ETF can lose money even when its reference security is flat, or over longer periods, even when it rises.
  • Leveraged ETFs are not suitable for all investors and involve significant risk, including the possible loss of the full principal value of an investment.

The Basics: How Do Leveraged ETFs Work?

A leveraged ETF is an exchange-traded fund that seeks to deliver a multiple of the performance of a reference security for a specified period of time.

Leveraged ETFs are designed for investors who have a high-conviction bullish or bearish expectation on how a security will perform. That reference security may be a single stock or another ETF, such as one that represents an index.

A 2X Long ETF seeks 200% of the reference security’s performance for the period. A 2X Short ETF seeks 200% of the inverse (-200%), so it seeks to generate a positive return when the reference security falls.

Because they are Exchange-Traded Funds (“ETF”), they trade like a stock. In other words, they offer intraday liquidity and transparency and can be bought and sold at any time during market hours through a standard brokerage account.

Compared with other methods of obtaining leverage, such as borrowing on margin or using options strategies, leveraged ETFs are generally considered easier to use and lower cost. Tradr’s ETFs use derivatives, primarily total return swaps, to seek their stated exposure.

Hypothetical Example
One Trading Day
Reference Stock
2X Long Daily ETF
2X Short Daily ETF
Stock rises 3%
+3.0%
+6.0%
-6.0%
Stock falls 3%
-3.0%
-6.0%
+6.0%

Shows the daily investment objective of a 2X Long and a 2X Short daily ETF for a single trading day in which the reference stock rises or falls 3%, before fees and expenses. Leveraged ETFs seek their stated multiple only for their reset period; over longer periods, returns compound and can differ significantly from the stated multiple. Does not represent any Tradr ETF or actual performance.

Watch This

Times to Use Single Stock ETFs

Tradr’s Matt Markiewicz discusses examples of when traders may want to employ leveraged ETFs to express their investment view.

The Three Levers of a Leveraged ETF

Every leveraged ETF can be described by three characteristics: what it tracks, what exposure it seeks and when its
performance target resets.

1

Security

What is the ETF’s

reference asset?
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Tradr’s lineup includes single stocks, other ETFs, and index-linked exposures.
2

Exposure

Does it invest short or long

and at what leveraged

multiple?
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Tradr’s long funds seek 2X (200%); most short funds seek -2X (-200%).
3

Timing

How often does

the performance target

reset: daily, monthly, or quarterly?
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Timing is the lever investors most often overlook, and it has a major effect on how a fund behaves over any holding period.

What Is a Reset Period?

A reset period indicates the specific window over which a leveraged ETF seeks its stated multiple. At the end of each period, the fund’s exposure is reset to its target, such as 2X or -2X, and a new period begins.

Tradr offers three reset periods:

  • Daily — the fund seeks its multiple of the security’s performance for a single trading day, defined as the close of trading on one business day to the close of trading on the next business day.
  • Monthly — the fund seeks its multiple of the security’s performance for a full calendar month, measured from the close of trading on the last business day of one calendar month to the close of trading on the last business day of the following month.
  • Quarterly — the fund seeks its multiple of the security’s performance for a full calendar quarter, measured the same way, quarter to quarter.

The first leveraged ETF launched in 2006, and for nearly two decades every leveraged ETF in the U.S. reset daily. In 2024, Tradr launched the industry’s first monthly and quarterly reset leveraged ETFs, alongside its daily reset lineup. Monthly & Quarterly Reset Leveraged ETFs are also known as “Calendar Reset” Leveraged ETFs.

Reset period
What the fund seeks
The period is measured
Example Tradr ETFs
Daily
2X or -2X of the reference security’s daily performance
Close of trading on one business day to the close of trading on the next (a single trading day)
TARK, SARK, TSLQ, NVDS — and more than 70 others
Monthly
2X of the reference security’s calendar-month performance
Last business day of one month, close of trading, to the last business day of the next
MQQQ
Quarterly
2X of the reference security’s calendar-quarter performance
Last business day of one quarter, close of trading, to the last business day of the next
QQQP, SPYQ

Why the reset period matters: a leveraged ETF delivers its stated multiple only for its reset period. Held longer — or bought mid-period — performance reflects the compounding of each period’s returns and can differ significantly from the multiple. How much it differs depends on volatility and time.

Who Are Leveraged ETFs Designed For?

Leveraged ETFs are not suitable for all investors. They are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies, who:

  • understand the risks associated with the use of leverage
  • understand the consequences of seeking leveraged or inverse investment results for the fund’s reset period — daily, calendar month, or calendar quarter
  • for short funds, understand the risks of shorting, and
  • intend to actively monitor and manage their investment.

These funds are not designed for investors who plan to buy and hold without monitoring their position, or who do not fully understand how leveraged ETFs behave over periods different from their reset period.

What Are the Key Risks?

Every leveraged ETF magnifies the performance of a reference security, whether it goes up or down.
The principal risks include:

1

Leverage risk.

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Leverage increases the risk of a total loss of an investor’s investment. For a 2X daily fund, a single-day adverse move in the reference security approaching 50% at any point in the day could result in the total loss of an investor’s investment, even if the reference security subsequently recovers all or part of that move.
2

Compounding risk.

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For any period longer than the reset period, the fund’s return is the compounded result of each period’s leveraged returns and will very likely differ from the stated multiple. A fund can lose money over time even if its reference security’s performance is flat. It is also possible for a fund to lose money even if the reference security rises over a longer period.
3

Volatility risk.

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The more volatile the reference security, the greater the impact of compounding. The volatility of the reference security may affect the fund’s return as much as, or more than, the return of the reference security itself.
4

Correlation risk.

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Fees, expenses, financing costs, and portfolio constraints can cause a fund’s performance to differ from its stated multiple even within a single reset period.
5

Derivatives and counterparty risk.

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The funds rely primarily on swaps with financial institutions (that we call “counterparties”). The value of these contracts depends on the counterparty’s ability to perform.
6

Single-stock concentration risk.

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Funds referencing a single stock also carry the concentrated company, industry, and sector risks of that stock.

These risks are described in full in the relevant fund’s prospectus. Read the prospectus carefully before investing, which you can download from each fund’s web page.

Smart Questions to Ask

2X means the fund seeks 200% of the performance of its reference security for the reset period, before fees and expenses. -2X means the fund seeks 200% of the inverse: it seeks to rise when the reference security falls, and it will fall when the reference security rises.

Tradr’s Leveraged ETFs provide a return based on the performance of the underlying reference security for one of the following specified reset periods:

Daily — defined as the close of trading on the last business day to the close of trading on the next business day.

Monthly — a full calendar month is defined as the close of trading on the last business day of one calendar month to the close of trading on the last business day of the following calendar month.

Quarterly — a full calendar quarter is defined as the close of trading on the last business day of one calendar quarter to the close of trading on the last business day of the following calendar quarter.

Tradr ETFs are actively managed funds that use derivatives, such as total return swaps, to seek the leveraged performance of the underlying security. They are rebalanced daily, monthly or quarterly, based on their stated reset period, to maintain their long or short exposure and to pursue their performance target. There can be no assurance that the Funds will achieve their objectives.

Let’s use a monthly reset period as an example. The only way to precisely seek the intended leverage is to buy the ETF at the market close on the last day of the previous month and sell it at the market close on the last day of the following month. Of course, you can hold the ETF for longer than a month, but remember that it will only seek to deliver the intended performance for one calendar month exactly, and then the performance period will be reset.

The same logic can be applied to daily and quarterly reset periods.

If you purchase shares at a time other than the close of the last business day of a calendar month or quarter, you will generally receive more, or less, than the intended leverage (such as 200% for a 2X long fund) exposure to the underlying reference security from that point until the end of the period.

Investors who invest for periods longer than the period specified by the fund (whether daily or for a full calendar month or quarter) should not expect to achieve the intended leverage (e.g., 200%) of the performance of the underlying security. The return will be the compounded return over the holding period, which will very likely differ from 200% of the return of the underlying security over that same time.

The impact of compounding can be more pronounced the longer the shareholder holds the ETF. Additionally, higher price volatility for the reference security will increase the impact of compounding on an investor’s returns. The Fund can lose money if the security’s performance is flat and, in some cases, even when the performance is positive.

Learn more: Volatility Drag & Compounding in Leveraged ETFs

A daily leveraged ETF’s end-of-day net asset value (NAV) seeks to deliver approximately its stated multiple of the end-of-day return of the reference security. Intraday, the last-sale percentage change of the ETF may not exactly reflect the multiple of the reference security’s last-sale change: quoted prices are posted by liquidity providers, including market makers, and the ETF’s market price can trade at a premium or discount to NAV based on supply and demand. As a result, intraday price movements may differ from the exact stated multiple, even when the fund’s NAV is tracking its objective closely. This is an important and often misunderstood fact about daily leveraged ETFs.

No. Your losses are generally limited to the amount you invest in the fund. However, because these are leveraged ETFs, you could lose a substantial portion or even all of your investment in a short period of time.

Both strategies seek to increase exposure to a reference security, but they work differently. Margin investing involves borrowing money from your broker and may require additional funds to be deposited if the value of your position declines. A leveraged ETF provides leveraged exposure in a single ETF wrapper and does not require investors to maintain a margin account or meet margin calls.

A key advantage of all Exchange Traded Funds, including Tradr ETFs, is that you can purchase and sell ETF shares during the U.S. market trading session, similar to stocks. Keep in mind that you are not required to stay in your position for the specified reset period. For example, you may exit a quarterly leveraged ETF at any time, even if you did not hold it for a full calendar quarter.

Keep Learning

Long vs. Short Leveraged ETFs Explained

How Long and Short funds behave

Daily vs. Monthly & Quarterly Reset ETFs

How the reset period changes what a leveraged ETF delivers

Volatility Drag & Compounding

Why leveraged ETF returns deviate from the multiple over time

All Tradr ETFs

Explore our daily, monthly, and quarterly leveraged ETFs

How to Invest

You may invest in Tradr ETFs through your brokerage account, including the major online brokers below.
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Category placements for ETFs to Watch and ETFs by Trending Themes are determined by Tradr ETFs using internal data and methodology, are based solely on comparisons among Tradr ETFs, and are provided for informational purposes only; they are not determined by or endorsed by any third party. 

Important Risk Information

ETF shares are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. There can be no guarantee that an active trading market for ETF shares will develop or be maintained, or that their listing will continue or remain unchanged. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions and frequent trading may incur brokerage costs that detract significantly from investment returns.

 
There are risks involved with investing including the possible loss of principal. Diversification does not guarantee investment returns or eliminate the risk of loss. Past performance does not guarantee future results.
 
Investors should carefully consider the investment objectives, risks, charges and expenses of the fund before investing. To obtain a prospectus containing this and other important information, please visit the fund page to download a prospectus online. Read the fund’s prospectus here carefully before you invest.
 
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