Ins and Outs Of Leveraged ETFs

There’s a lot of misunderstanding about ETFs that invest in indexes using leverage. Usually they obtain their leverage by using futures contracts. A lot of people don’t understand the math and other details about futures contracts. This article goes into some details about leveraged ETFs and explodes a couple of myths about leveraged ETFs.

So what’s the catch? Why doesn’t everyone just buy and hold leveraged ETFs like TQQQ?

Well, for one thing, they can’t stomach the volatility. This has been one of the lowest volatility periods in market history and TQQQ still has annualized volatility of over 49% since its inception.

Volatility cuts both ways, and most investors would have a hard time sitting through the higher drawdowns that go hand-in-hand with increased leverage. Even in an extended period of tranquility for U.S. equities, drawdowns for the 3x leveraged Nasdaq 100 have been considerable (max of 45% back in 2015-2016, with many 20+% declines).