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.

However, 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, 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 exchange-traded funds (ETFs) with the highest three-month average daily volume are SQQQ, TQQQ, and UVXY.
  • These ETFs provide inverse leveraged exposure to the Nasdaq-100 Index, leveraged exposure to the Nasdaq-100, and leveraged exposure to the S&P 500 VIX Short-Term Futures Index, 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 two or three times the daily performance of their index. But some offer 0.5 or 1.5 times, or even inverse leverage, such as -2× and -3× 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 a few days.

Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities that 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 2× 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 U.S. Securities and Exchange Commission (SEC) alert.

There are 89 distinct leveraged ETFs that trade in the United States, 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 fund aims at achieving its investment objective on a daily basis. The three funds below are thus not ranked by one-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 33.5% over the past year, as of Aug. 17, 2021. The most traded leveraged ETF, based on three-month average daily trading volume, is the ProShares UltraPro Short QQQ (SQQQ).

We examine the three most traded leveraged ETFs below. All numbers below are as of Aug. 17, 2021.

ProShares UltraPro Short QQQ (SQQQ)

  • Three-Month Average Daily Volume: 72,793,672
  • Performance Over One-Year: -68.7%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $1.7 billion
  • Inception Date: Feb. 9, 2010
  • Issuer: ProShares

SQQQ offers 3× daily short exposure to the tech-heavy Nasdaq-100 Index, a major market index composed of 100 of the largest nonfinancial 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, then 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 3× daily short leverage. The fund’s high trading volume suggests significant interest from investors looking to short a major index amid the heightened volatility over the past year.

ProShares UltraPro QQQ (TQQQ)

  • Three-Month Average Daily Volume: 27,003,468
  • Performance Over One-Year: 103.1%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $13.8 billion
  • Inception Date: Feb. 9, 2010
  • Issuer: ProShares

TQQQ provides 3× 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, then 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.

ProShares Ultra VIX Short-Term Futures (UVXY)

  • Three-Month Average Daily Volume: 20,773,086
  • Performance Over One-Year: -87.8%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • Assets Under Management: $966.2 million
  • Inception Date: Oct. 3, 2011
  • Issuer: ProShares

UVXY offers 1.5× 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 1.5× 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.

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