Clients Are Holding Highly Leveraged ETFs Way Too Long

Sometimes, you just have to let it go.

Leveraged exchange-traded products have been all the rage in recent months, with almost 60 new filings for funds that track companies like Google, Robinhood and Uber coming online in October alone. Total assets in leveraged US equity ETFs hit $125B as of Dec. 25, up from $106B at the end of 2024, according to Morningstar Direct. Across the pond, three of the top 10 most traded ETPs on the London Stock Exchange featured 3X leverage strategies, including the top traded fund in December: the Leverage Shares 3x Tesla ETP. 

Now, a UK securities regulator is raising red flags. The Financial Conduct Authority recently released data on how the products are being used by advisors and retail investors alike, and (you guessed it) most investors aren’t using them as intended. “Some consumers may intentionally hold these products longer as part of their investment strategy,” the authors of the report wrote. “But others may not fully understand the recommended holding periods, or the risks involved.”

We’re Leveraged Out

The review of 11 firms, including wealth managers and direct-to-consumer platforms, found 82% of trades were held longer than the recommended one-day window. In other words, investors forgot to read the fine print, just skimmed it or treated it like directions on assembling an Ikea coffee table. Some other problem areas included:

• Some advisory firms lacked detail on total expenses for clients, focusing on their service fees, without assessing the impact of product costs.
• Few firms had processes in place to identify or address the potential for poor outcomes for clients.

To be sure, the regulator has no plans to ban the products, but it does expect firms to be far more intentional about who gets access to them. If harm is identified, the FCA said it expects firms to take proactive steps rather than wait for regulators to come knocking. “Complex ETPs that are held longer than intended are particularly susceptible to tracking errors due to daily price resets, increasing the potential for unexpected losses,” the FCA wrote. “Distributors should define and regularly review their target market for complex products at a granular level.”

Hold On a Sec: While there are 3X funds trading in the states, US regulators aren’t thrilled with the flood of new highly leveraged products. The Securities and Exchange Commission sent  warning letters to nine issuers in December — including Direxion, GraniteShares and ProShares — effectively stopping the review process for new funds with more than 2x exposure.

“Regularly review the value your products provide,” the FCA wrote. “Where you identify issues or poor outcomes, we expect firms to take appropriate action, such as adjusting pricing or restricting access where necessary.”