Leverage Is Almost Everything for These ETF Issuers

Which lever to pull…

Clients have a growing list of options when it comes to ETFs that use leverage. Issuers are prepping new funds almost daily, in some cases even filing for single-stock products focused on companies that aren’t public yet. During February, for example, several firms filed for 2x leveraged ETFs built around SpaceX, Anthropic and other tech companies. Some are also trying their luck again with dozens of 3x and 4x products, even after the Securities and Exchange Commission told them last year that anything over 2x doesn’t jibe with limits on leverage. 

But will retail investors want such funds, which for some could present unreasonable levels of risk?

Trading Places

Traders have used leveraged ETFs heavily during market selloffs since 2020, when the COVID-19 pandemic brought more attention to the product category, according to a report this week from Direxion. But there hasn’t been consistency in how the funds are used, in part because the category has expanded so quickly, as it now includes a mind-boggling amount of single-stock ETFs. There were high levels of turnover in 2020 as traders moved between long- and short-leveraged ETFs. Following that, people made long bets against the stock market’s slower decline in 2022, Direxion found. And last year, amid President Trump’s tariff announcements, leveraged ETF traders bought long funds for 35 days straight, as the S&P 500 fell 19%. “The first day short positions dominated new flows was on April 9, or the stock market’s best day in years,” the report read.

“We’ve been fortunate these past few years in that the dips have reverted quickly,” said Ryan Lee, senior VP in product and strategy at Direxion. “Dip buying in recent years has been very successful.” On the whole, it’s unclear whether leveraged ETFs have been profitable for investors, though the trends suggest that many people have been using them as intended, Lee said. That is, many users don’t hold them for very long and monitor them daily. Still, research from the UK found most investors held leveraged ETFs for more than a single day. “These are meant to be tools in your toolbox. These are not meant to be the only things you hold,” he said.

In that regard, issuers are planning to add a lot more tools:

• ProShares, Tradr, GraniteShares and Leverage Shares are all seeking approval of 2x leveraged ETFs focused on pre-IPO companies such as OpenAI, SpaceX, Anthropic, Kraken, Stripe and ByteDance.
• GraniteShares, Direxion, Leverage Shares and Rex Shares have filed for numerous 3x and 4x ETFs focused on single stocks, thematics or other ETFs.

Yield, Don’t Stop: But GraniteShares, which is planning to expand its product roster dramatically, sees the most promise in autocallable ETFs, the first two of which debuted earlier this month, said Matthew Lamb, portfolio consultant at the firm. Those, the GraniteShares Autocallable NVDA and Tesla ETFs, each represent about $1 million in assets. “Our goal is to disrupt the structured note business,” Lamb said, pointing to high minimums, low liquidity and considerable fees. “The ETF wrapper is going to present a pretty compelling alternative to that.”