Pulling the lever

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  By Guest Blogger Doug Rowat

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According to Bloomberg, there are now more than 17,000 ETFs listed globally. While this raw number itself is staggering, what’s perhaps even more remarkable is that it all began, in the US at least, with just one ETF, the SPDR S&P 500 ETF Trust, back in 1993, which, from a financial-history perspective, really isn’t that long ago.

That ETF, of course, still exists and is amongst the largest in the world with a market cap of more than US$650 billion. According to journalist Robin Wigglesworth’s book on the history of ETFs, Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever, that path to index investing was, to say the least, an interesting one:

It features a colorful cast of former farmhands turned computer geeks, amateur jazz musicians, former seminarians, fallen academics, avuncular acoustic physicists, a charismatic secretary turned CEO, finance industry titans, and even a brief cameo from the Terminator.

Yes, Arnold Schwarzenegger was an early investor in the ETF industry. However, that crazy cast of ETF pioneers couldn’t possibly have foreseen how quickly the space would grow let alone how much more complex it would become.

It took roughly 15 years for the first actively managed and leveraged ETFs to appear on the market, but now actively managed and leveraged ETFs combined make up over a third of the industry. Leveraged ETFs, in particular, are now one of the fastest growing segments of the ETF market with ever more exotic products being added in recent years, including single-stock leveraged ETFs, which first appeared in 2022. If unleveraged exposure to volatile US technology stocks doesn’t provide enough excitement for you, now you can now really blow your brains in with single-stock 3x leveraged ETFs.

And it’s this leveraged segment of the ETF market that I want to focus on here.

I’ve highlighted many times that leveraged ETFs are designed only for tactical, short-term trading and outlined the many dangers of volatility drag, which can result in performance that’s often the opposite of what might be implied by the ETF name itself (e.g., a ‘bull’ ETF can still easily decline even if the underlying security or index rises).

If you fancy yourself a masterful short-term trader then who am I to argue the use of leveraged ETFs. But expert short-term traders are exceptionally rare and you’re almost certainly not one of them. Additionally, all investors are susceptible to loss aversion. It’s human nature to want to hang on to our losing positions until, at the very least, they break-even. But longer holding periods are the enemy of leveraged ETFs.

So, let’s ignore for a moment whether or not you’re a great short-term securities trader (another reminder: you’re not) and allow me to illustrate, in a general sense, how terribly the odds are stacked against you when using leveraged ETFs.

I first reduced the ETF universe into a smaller and more investable ETF pool. I focused solely on North American–listed ETFs and set a minimum market cap of US$75 million, which is roughly the investment level that an ETF requires to be economic. In other words, all the international-listed, foreign currency and not-certain-to-survive-into-next-week micro-cap ETFs were eliminated, which most Canadians wouldn’t invest in anyways. This reduced the universe to a still-sizeable 3,000 ETFs.

From here, I isolated the ETFs that utilize leverage and then looked at 1-year, 3-year and 5-year returns as well as standard deviations (a measure of volatility, lower number the better) over the same periods. Again, I recognize that leveraged ETFs aren’t necessarily designed to be held for such lengths of time, but I’m broadly illustrating return erosion (thus the danger of holding them longer term) as well as the extraordinary volatility that investors must endure in the process. The overall results don’t paint a pretty picture for leveraged ETF

Leveraged ETFs vs the SPDR S&P 500 ETF Trust and the iShares Core US Aggregate Bond ETF

Source: Bloomberg, Turner Investments

An argument can be made that markets have done well over the past five years, particularly in the past three years, so therefore the leveraged ‘bull’ ETF returns have been eroded by the leveraged ‘bear’ ETF returns. Fair point. And, indeed, when the ‘bear’, ‘short’ and ‘inverse’ ETFs are removed, the 1-year return does improve significantly; however, the 3-year and 5-year returns still meaningfully trail the straightforward SPDR S&P 500 ETF Trust and, as if it were possible, the volatility profile for the leveraged ETFs actually gets worse:

‘Bull’ leveraged ETFs vs the SPDR S&P 500 ETF Trust and the iShares Core US Aggregate Bond ETF

Source: Bloomberg, Turner Investments

It should also be noted that that 1-year leveraged ETF return, though nearly double the return of the SPDR S&P 500 ETF, comes with almost 5x the volatility. It also supposes that you took a bullish stance on the market in the first place. Don’t make me highlight how the ‘bear’ ETFs did in isolation!

I also haven’t touched on the extraordinary cost of leveraged ETFs. While most mainstream passive ETFs such as the SPDR S&P 500 ETF and the iShares Core US Aggregate Bond ETF charge a pittance, leveraged ETFs—for the privilege of enduring extraordinary volatility and a high likelihood of underperformance—make you pay through the teeth:

Leveraged ETFFs are extraordinarily expensive

Source: Bloomberg, Turner Investments

There’s no disputing that there will inevitably be a small group of savvy investors who record spectacular gains utilizing leveraged ETFs. But, in aggregate, most won’t. Leveraged ETFs are expense products that will stymie the average investor.

So, let’s call the use of leveraged ETFs what it really is: gambling.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/08/30/pulling-the-lever/