“Levered ETFs may appeal to those who wish to hedge other positions, those with strong directional views, or those with so-called ‘lottery preferences.’”
— Larry Swedroe (quoting Hendrik Bessembinder)
There’s a quiet irony at the heart of modern financial innovation. Products are often launched in the name of empowerment—more access, more control, more opportunity—yet they can end up doing the most damage to the investors least equipped to use them properly.
2× and 3× leveraged single-stock ETFs, mainly U.S.-listed ones, sit squarely in that uncomfortable space.
Since their debut in mid-2022, these ETFs have exploded in popularity. By mid-2025, the lineup had grown to more than 100 funds, together holding roughly $17 billion in assets. On the surface, the appeal is obvious. These products offer amplified exposure—2× or 3×, sometimes inverse—to familiar household names like Tesla, Apple, and Nvidia, without the need for margin accounts or options trading.
It feels like progress. Easy access. Simple execution. Bigger potential gains.
But as Larry Swedroe carefully walks readers through1, popularity and suitability are not the same thing.
At the core of his analysis is empirical research by Hendrik Bessembinder, which examines the real-world performance of leveraged single-stock ETFs through June 2025. The findings are sobering. Across nearly 20,000 fund-days, these ETFs produced average daily returns that lagged meaningfully behind their underlying stocks. Even when leverage was applied in the “right” direction, results still fell short.
On a monthly basis, the drag becomes even clearer. Leveraged single-stock ETFs underperformed simple benchmark expectations by roughly 0.88% per month. About half of that gap came from the mechanics of daily rebalancing; the other half stemmed from frictional costs tied to swaps, financing, and trading spreads. And the higher the leverage, the steeper those costs became.
This isn’t a rounding error. It’s structural.
The reason lies in how these ETFs are built. High-leveraged single-stock ETFs are designed to track daily returns—not weekly, not monthly, and certainly not long-term outcomes. To maintain constant leverage, the funds rebalance every single day. That daily reset introduces a trio of effects most investors underestimate.
- First, there’s compounding mismatch. Over time, returns don’t neatly scale by two or three times. They depend on the path the stock takes to get there.
- Second, volatility decay quietly eats away at performance when prices bounce around. The fund repeatedly buys high and sells low as it resets leverage.
- Third, path dependency means that two investors can see wildly different outcomes even if the stock ends up in the same place—simply because the journey differed.
Put plainly, these are not buy-and-hold instruments. They may deliver exactly what they promise on a daily basis, yet still disappoint anyone who holds them longer than intended.
Swedroe also highlights the disconnect between product design and investor behavior. Issuers are explicit in their marketing, emphasizing “daily” exposure and positioning these ETFs for short-term trading. But investors don’t experience markets in daily increments. They experience stories—about Tesla rallies, AI revolutions, and runaway momentum. That narrative pull makes it easy to hold these products far longer than the fine print suggests.
For advisors and investors, the implications are clear.
Leveraged single-stock ETFs are trading tools, not investment building blocks. They introduce complexity where simplicity is usually rewarded. And they demand a level of discipline, timing, and mechanical understanding that most long-term investors neither need nor want.
Innovation itself isn’t the problem. Misunderstanding it is.
As Swedroe makes clear, these products are precise, mathematically elegant, and capable of doing exactly what they’re engineered to do. The danger arises when investors expect them to behave like traditional ETFs. In markets, structure shapes outcomes—and sophistication without comprehension always comes at a cost.
Footnote:
1 Swedroe, Larry. "The Hidden Risks of Leveraged Single-Stock ETFs." Alpha Architect, 2 Jan. 2026, alphaarchitect.com/leveraged-single-stock-etfs.
