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 in 2020 to exploit the recent 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 SPXS.
  • These ETFs provide leveraged exposure to the NASADQ-100 Index, the S&P 500 VIX Short-Term Futures Index, and the S&P 500 Index, respectively.
  • The most traded leveraged ETFs provide short exposure to major market indexes or long exposure to volatility 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 75 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. We examine the top 3 most traded leveraged ETFs below.

There is no benchmark for these funds and each aims at achieving its investment objective on a daily basis. But on an annual basis, all three have dramatically underperformed the S&P 500's total return of 17.9% over the past 12 months, as of November 17, 2020. The most traded leveraged ETF, based on 3-month average daily trading volume, is the ProShares UltraPro Short QQQ (SQQQ). All numbers below are as of November 18, 2020.

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.

ProShares UltraPro Short QQQ (SQQQ)

  • 3-Month Average Daily Volume: 76,082,784
  • Performance over 1-Year: -85.2%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: 0.91%
  • Assets Under Management: $1.3 billion
  • Inception Date: February 9, 2010
  • Issuer: ProShares

SQQQ offers 3x daily short exposure to the 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 triggered by the COVID-19 pandemic.

ProShares Ultra VIX Short-Term Futures (UVXY)

  • 3-Month Average Daily Volume: 41,956,644
  • Performance over 1-Year: -23.8%
  • Expense Ratio: 1.65%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $1.3 billion
  • Inception Date: October 3, 2011
  • Issuer: ProShares

UVXY offers 1.5x daily exposure to the S&P 500 VIX Short-Term Futures Index, an index designed to gauge the movements of futures contracts linked to the Cboe Volatility Index (VIX). The VIX is commonly referred to as the "fear gauge" or "fear index", and has risen this year amid the pandemic and other uncertainties. 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. 

Direxion Daily S&P 500 Bear 3X Shares (SPXS)

  • 3-Month Average Daily Volume: 38,639,468
  • Performance over 1-Year: -69.8%
  • Expense Ratio: 1.08%
  • Annual Dividend Yield: 1.30%
  • Assets Under Management: $612.8 million
  • Inception Date: November 5, 2008
  • Issuer: Direxion

SPXS offers 3x daily short exposure to the S&P 500 Index, an index of the 500 largest U.S. companies. On a day when the S&P 500 falls 1%, SPXS is expected to provide investors with a return of 3% on that same day. The ETF uses securities including index swaps in order to achieve the 3x daily short leverage for bearish investors. The fund resets at the end of each day, which will result in compounding of returns if held for multiple periods. It is intended for sophisticated investors with high levels of tolerance for risk and volatility.  Like SQQQ above, SPXS offers investors the opportunity to profit from declines in a major U.S. stock index, a popular trade this year amid the pandemic and other uncertainties.

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