Recently the SEC halted its review of highly levered ETFs in a signal they may be attempting to curb this burgeoning asset class.
Tuttle Capital, the firm who rose to prominence from the release of its 2x MicroStrategy ETF, got the ball rolling in early October when they filed for 59 new 3x single stock ETFs under the RexShares banner[1], further cementing their position at the apex of product innovation. Shortly after a fury of competitors followed, all perhaps hoping to capitalize on a dark period of regulation during the recent government shutdown.
While the flood may be stemmed for now, there are already a staggering number of levered ETFs in the market. These ETFs have the potential to provide real value to short-term traders, especially those who cannot access cheap margin or are afraid of being margin-called, but they come with significant costs. While these ETFs generally deliver on their advertised daily returns, over time the combination of their implementation costs and volatility create a significant drag on performance.
It is easy to see why investors have a strong appetite for these products as the returns for the largest 5 (by AUM) levered index ETFs have generally been staggering in the recent market environment:
Source: Bloomberg, 1-year return data from 12/31/2024 – 12/3/2025. 3-year return data from 12/4/2021 – 12/4/2025. For illustrative purposes only.
In the past, levered ETFs like the ones above have been reserved for large index-like asset classes which typically don’t exhibit outsized volatility before additional leverage is applied. Even so, when adjusting for their Beta (Risk!) to the underlying, underperformance appears to have been quite strong and consistent, implying relatively dire consequences in a weaker market. It is likely many investors are aware of this drag and are happy to “pay” in exchange for the leverage, but once this leverage gets applied to already volatile assets such as single stocks the costs become far more burdensome.
Here’s the data from the 5 largest (by AUM) single stock ETFs over the last year:
Source: Bloomberg, 1-year return data from 12/31/2024 – 12/3/2025. For illustrative purposes only.
There appears to be a “speed limit” on volatility which most of these new ETFs are exceeding as they apply leverage to what are already the most “exciting” securities in the market. When reviewing the performance of the 100 largest (by AUM) levered ETFs there is a clear, strong, negative relationship between alpha and volatility.
Source: Bloomberg, 12/31/2024 – 12/3/2024. For illustrative purposes only.
While it is good to see the SEC looking out for investors, it is clear this category of products presents a new and enticing risk for investors and should be approached with a high degree of caution. It will be interesting to see if the increasing access to leverage via ETFs will cause more volatility for the type of assets these recently launched ETFs are targeting. Crypto markets have recently highlighted the risks of leverage on already volatile assets[2] as forced liquidations from brokers in the space have accelerated a large drawdown. If investors flee the levered ETF space during a period of stress those ETFs own selling or lack of buying may exacerbate the moves of their underlying assets.
[1] https://x.com/EricBalchunas/status/1975537558194106807
[2] https://www.theinformation.com/articles/borrowed-money-fueled-cryptos-700-billion-sell?utm_campaign=article_email&utm_content=article-15894&utm_medium=email&utm_source=sg
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