Exchange-traded funds (ETFs) offer investors a straightforward way to own a single security whose performance is based on a much larger, basket of securities. Typically, the basket is constructed to track the performance of an underlying index, such as the S&P 500. Likewise, leveraged ETFs provide investors with a single investment vehicle representing a broad basket of securities. But these leveraged ETFs are much more complex instruments than traditional ETFs and tend to focus their holdings heavily on debt and financial derivatives such as swaps in order to amplify the returns on the index being tracked. Many of these ETFs have been favored by investors over the past year to exploit the volatility in the markets due to the COVID-19 pandemic and related disruptions in the global and U.S. economies.

Key Takeaways

  • The leveraged ETFs with the highest 3-month average daily volume are SQQQ, UVXY, and TQQQ.
  • These ETFs provide inverse leveraged exposure to the Nasdaq 100, leveraged exposure to the S&P 500 VIX Short-Term Futures Index, and leveraged exposure to the Nasdaq 100, respectively.
  • The most traded leveraged ETFs provide long exposure to volatility as well as long and short exposure to a major market index amid the COVID-19 pandemic.

Leveraged ETFs often provide investors with the ability to achieve 2x or 3x the daily performance of their index. But some offer 0.5x, 1.5x, or even inverse leverage, such as -2x and -3x the performance. Thus, leveraged ETFs are suitable only for experienced investors with a high level of risk tolerance. They are most often used as short-term trading vehicles with most investors exiting their positions in just a day or few days.

Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities they represent, and losses can be amplified during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect that they will do so on longer-term returns. For example, a 2x ETF may return 2% on a day when its benchmark rises 1%, but you shouldn't expect it to return 20% in a year when its benchmark rises 10%. For more details, see this SEC alert.

There are 85 distinct leveraged ETFs that trade in the U.S., excluding funds with less than $50 million in assets under management (AUM). High trading volumes are the key gauge that many investors look at to decide which leveraged ETFs have been generating the most interest. These highly traded ETFs are likely to provide the most liquidity and, thus, may be easier to trade in and out of.

Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark's one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn't expect it to return 10% in a year when its benchmark falls -10%. For more details, see this SEC alert.

There is no benchmark for these funds and each one aims at achieving its investment objective on a daily basis. The three funds below are thus not ranked by 1-year total return. Instead, they are ranked by trading volume, a measure of liquidity. But for reference, the S&P 500 provided a total return of 48.7% over the past year, as of May 14, 2021. The most traded leveraged ETF, based on 3-month average daily trading volume, is the ProShares UltraPro Short QQQ (SQQQ). We examine the top 3 most traded leveraged ETFs below. All numbers below are as of May 17, 2021.

ProShares UltraPro Short QQQ (SQQQ)

  • 3-Month Average Daily Volume: 99,716,736
  • Performance over 1-Year: -78.4%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $1.9 billion
  • Inception Date: Feb. 9, 2010
  • Issuer: ProShares

SQQQ offers 3x daily short exposure to the tech-heavy Nasdaq-100 Index, a major market index comprised of 100 of the largest non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The ETF provides bearish investors a way to make speculative bets that the index will decline on a given day. If the fund's index drops 1% over the course of a single day, the fund is expected to return 3%. It resets on a daily basis, meaning that holding the fund for periods longer than a single day will result in compounding of returns and results that may differ significantly from the target return. SQQQ uses various index swaps on the Nasdaq 100 to achieve its target of 3x daily short leverage. The fund's high trading volume suggests there is significant interest from investors looking to short a major index amid the heightened volatility over the past year.

ProShares Ultra VIX Short-Term Futures (UVXY)

  • 3-Month Average Daily Volume: 93,248,376
  • Performance over 1-Year: -89.6%
  • Expense Ratio: 1.65%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $979.1 million
  • Inception Date: Oct. 3, 2011
  • Issuer: ProShares

UVXY offers 1.5x daily exposure to the S&P 500 VIX Short-Term Futures Index, an index designed to measure the performance of monthly Cboe Volatility Index (VIX) futures contracts with a weighted average of one month to expiration. The VIX is commonly referred to as the "fear gauge" or "fear index", and it spiked early last year at the beginning of the pandemic and has remained at elevated levels ever since. UVXY provides investors with a way to profit from expected increases in volatility, offering 1.5x the daily performance of its index. When the fund's index rises 1% on a single day, the fund is expected to rise 1.5%. The fund uses futures and swaps to achieve its intended target return. It is intended for short-term strategies by sophisticated investors and should not be used as part of a buy-and-hold portfolio.

ProShares UltraPro QQQ (TQQQ)

  • 3-Month Average Daily Volume: 40,951,080
  • Performance over 1-Year: 167.9%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $11.1 billion
  • Inception Date: Feb. 9, 2010
  • Issuer: ProShares

TQQQ provides 3x daily long exposure to the Nasdaq-100 Index. The ETF provides bullish investors a way to make significant gains on upward movements in the index over a given day. If the Nasdaq 100 increases 1% over the course of a single day, the fund is expected to rise 3%. Due to the daily reset feature, holding the fund for longer than a single day will result in compounding of returns and results that are likely to significantly differ from the target return. TQQQ is a tool for sophisticated investors and is not meant for those with a low risk tolerance or as part of a buy-and-hold investment strategy. The fund holds shares of companies that comprise the Nasdaq 100 and utilizes various index swaps to provide leveraged exposure to the index.

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