{"id":234510,"date":"2025-11-17T11:37:16","date_gmt":"2025-11-17T16:37:16","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=234510"},"modified":"2025-11-17T11:43:49","modified_gmt":"2025-11-17T16:43:49","slug":"whats-the-catch-with-leveraged-etfs","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/podcasts\/ibkr-podcasts\/whats-the-catch-with-leveraged-etfs\/","title":{"rendered":"What\u2019s the Catch with Leveraged ETFs?"},"content":{"rendered":"\n<p>Leveraged ETFs sound exciting; triple the gains, right? Not so fast. In this episode, we unpack the hidden risks, daily compounding effects, and why timing matters more than ever. Whether you\u2019re curious about hedging, short-term plays, or just want to know if these tools belong in your portfolio, this conversation will give you the clarity you need.<\/p>\n\n\n\n<iframe title=\"What\u2019s the Catch with Leveraged ETFs?\" allowtransparency=\"true\" height=\"150\" width=\"100%\" style=\"border: none; min-width: min(100%, 430px);height:150px;\" scrolling=\"no\" data-name=\"pb-iframe-player\" src=\"https:\/\/www.podbean.com\/player-v2\/?i=ma6i3-19c597a-pb&#038;from=pb6admin&#038;share=1&#038;download=1&#038;rtl=0&#038;fonts=Arial&#038;skin=1b1b1b&#038;font-color=ffffff&#038;logo_link=episode_page&#038;btn-skin=c73a3a\" loading=\"lazy\"><\/iframe>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-summary-ibkr-podcasts-ep-320\"><strong>Summary \u2013 IBKR Podcasts Ep. 320<\/strong><\/h2>\n\n\n\n<p><em>The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made<\/em>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson\"><strong>Andrew Wilkinson<\/strong><\/h3>\n\n\n\n<p>Some of this year&#8217;s best-performing equities aren&#8217;t those of individual companies. Instead, they are exchange-traded funds that magnify the performance of an underlying equity. In other words, if the price of the underlying stock moves up a dollar, the price of the ETF instrument moves up by one, two, or three times, depending on the leverage factor.\u00a0<\/p>\n\n\n\n<p>And in the opposite style, there are funds that track the inverse performance of the underlying. Should the company share price rise by a dollar, the ETF is designed to fall by one, two, or three dollars. Not so useful when prices are rising, but very useful when prices are falling.\u00a0With me to dig into the benefits and the drawbacks of the world of inverse and leveraged ETFs is Ed Egilinsky, who is the Managing Director of Direxion Funds, an ETF company that is a significant provider within that industry.\u00a0<\/p>\n\n\n\n<p>Welcome, Ed Egilinsky. How are you?&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-edward-egilinsky\"><strong>Edward Egilinsky<\/strong><\/h3>\n\n\n\n<p>Good. Good to see you.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson-0\"><strong>Andrew Wilkinson<\/strong>\u00a0<\/h3>\n\n\n\n<p>Now, Ed, what exactly are inverse and leveraged ETFs for the audience, and how do they differ from traditional ETFs or mutual funds?\u00a0<\/p>\n\n\n\n<p><strong>Edward Egilinsky<\/strong>\u00a0<\/p>\n\n\n\n<p>Well, you did a great job in your intro there\u2014I might have to travel with you. But leveraged and inverse ETFs are designed for short-term active trading, and I think you see significant daily turnover of assets and high volume with our products. And that denotes that this allows traders to express a magnified bullish or bearish view, as you mentioned, on broad industry sectors, broader indexes, and individual stocks as well.\u00a0The leverage points will range from 3x in our case to inverse 1x, and the key is within the name of overall leveraged inverse ETFs. It includes the leverage point, the word \u201cdaily\u201d\u2014we&#8217;ll discuss that later\u2014and the benchmark single stock it seeks to track.\u00a0And the bottom line, Andrew: these are high-risk\/reward vehicles, so not gonna be for everybody.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson-1\"><strong>Andrew Wilkinson<\/strong><\/h3>\n\n\n\n<p>Okay. Let&#8217;s dig down into that. Why are those ETFs then typically designed for single-day performance, and what happens when investors hold them longer?\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-edward-egilinsky-0\"><strong>Edward Egilinsky<\/strong><\/h3>\n\n\n\n<p>Well, the objective is to seek to track the leverage point for a given single day. Once you hold these past one day, there&#8217;s gonna be something called compounding, and the leverage could work for or against you. So the trend is your friend. If your timing is wrong, you could have excessive losses.\u00a0So let&#8217;s take a simple two-day example. I have $100 and I have a 3x bull fund. And for two days in a row, that underlying index goes up 5% each day. So you made 15% each day. But due to compounding, you are gonna be above that $130 mark after two days.\u00a0<\/p>\n\n\n\n<p>The flip side is if you have a two-day period where a 3x bull fund has the underlying index up 5% the first day, down 5% the second day. Ideally, you&#8217;d think you&#8217;d be back to your initial $100, but because of compounding, you are actually below your initial investment after two days and you&#8217;re at $97.75, so you&#8217;re actually down.\u00a0So I think those are two simple examples of when the trend works for you two days in a row and when it&#8217;s choppy, where you have the index go up and down the same amount on consecutive days\u2014that you&#8217;re below your initial investment in that example.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson-2\"><strong>Andrew Wilkinson<\/strong>\u00a0<\/h3>\n\n\n\n<p>All right, so talk about the tactical strategies where these products shine, such as hedging, short-term speculation, or volatility plays.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-edward-egilinsky-1\"><strong>Edward Egilinsky<\/strong><\/h3>\n\n\n\n<p>Well, certainly you could trade off headlines. We have a lot of people do that based on geopolitical risks, macro events. So China comes to mind, for example\u2014leveraged bull\/bear on the FTSE China 50.\u00a0Earnings: we just got out of the main earnings season; people trade off pre- and post-earnings. The \u201cMag Seven\u201d come to mind, of course\u2014a lot of them reported last week, some with mixed results. So we have leveraged single stock where you could do a 2x bull or a non-leveraged inverse bear.\u00a0And then we have economic data, albeit that right now the government shutdown means not a lot of data points that you would normally have. Fed meetings: we see a lot of trading in our leveraged Financial Select Sector Index, as well as the 20+ Year Treasury Bull and Bear\u2014those are very popular.\u00a0What&#8217;s going on right now with U.S.\u2013China? Seems like something&#8217;s always going on, especially with trade negotiations, government regulation\u2014potentially with the semis and software\u2014so you could trade those leveraged bull and bear products.\u00a0<\/p>\n\n\n\n<p>Spikes in the VIX: we&#8217;re seeing that more recently now. It&#8217;s been very complacent in terms of the marketplace since really you had the 90-day moratorium post-Liberation Day.\u00a0So for people that want to take a magnified short-term view: on a bullish side, you don&#8217;t need margin. With this, it&#8217;s an ETF\u2014your liability is limited to your initial investment. And for those that feel the market might go down or wanna take a short-term bearish view, here&#8217;s a way to do it in an inverse fund without having unlimited risk.\u00a0<\/p>\n\n\n\n<p>Now you mentioned hedging. You&#8217;ve had tremendous run-ups in a number of the Mag Seven. You may want to use an inverse type of single stock to maybe hedge some gains there at times. However, you&#8217;re gonna need to rebalance periodically to maintain that whatever net long exposure that you want.\u00a0So these are useful trading tools. You can trade off headlines or you can trade off technicals, but the key is you gotta monitor these on a day-to-day basis.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinso-n\"><strong>Andrew Wilkinso<\/strong>n<\/h3>\n\n\n\n<p>Are there any misconceptions\u2014common misconceptions\u2014amongst retail investors about inverse and leveraged ETFs?\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-edward-egilinsky-2\"><strong>Edward Egilinsky<\/strong><\/h3>\n\n\n\n<p>You can hold these indefinitely\u2014that you&#8217;re gonna get a 2x or 3x cumulative return over a period of time when you hold them. So there&#8217;s a lack of understanding in terms of the compounding impact and that the timing matters\u2014not monitoring these on a daily basis. You can&#8217;t set and forget these vehicles. And most people, although they understand the risk, until you lose a significant amount of money, if you&#8217;re on the wrong side of a trade you wanna make sure that whatever you are risking, you can afford to lose.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson-3\"><strong>Andrew Wilkinson<\/strong><\/h3>\n\n\n\n<p>But what about the recent trends? It&#8217;s been a very interesting year. What about the recent trends in ETF flows or investor behavior that suggest increased or decreased interest in these products?\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-edward-egilinsky-3\"><strong>Edward Egilinsky<\/strong><\/h3>\n\n\n\n<p>Well, certainly there&#8217;s been a big focus on tech\u2014semis, AI. But also you&#8217;ve had a tremendous move in gold and gold miners. People are trying to predict the next interest rate move. The Fed says they&#8217;re gonna cut, but who knows? So we&#8217;re seeing a lot of activity there.\u00a0But it&#8217;s interesting\u2014we have seen a lot of outflows in our bull funds. And a large part of that is due to profit-taking, you would hope. And we&#8217;re seeing a lot of inflows in bear funds where people are trying to look for a reversal, think things are overextended. But the bulls have been winning out the last couple of months for sure.\u00a0But it tends to be counterintuitive\u2014our flows\u2014when the market&#8217;s doing real well in certain sectors or broader market. We&#8217;ll see selling into that strength. And then you&#8217;ll see some inflows into bear funds. All of our outflows year-to-date so far\u2014the top 10\u2014are all bull funds.\u00a0<\/p>\n\n\n\n<p>On the flip side, the inflows year-to-date\u2014what&#8217;s interesting\u2014there&#8217;ve been some underperforming sectors, Andrew, like homebuilders, for example. So we&#8217;re seeing inflows there. Tesla, despite the fact it&#8217;s rallied the last couple of months\u2014we had sizable inflows the first couple of months of the year where it was underperforming.\u00a0So we have seen some inflows for the most part in bear funds. There have been some exceptions, like regional banks and homebuilders, and some of the single stocks, which I mentioned.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson-4\"><strong>Andrew Wilkinson<\/strong>\u00a0<\/h3>\n\n\n\n<p>What should investors ask themselves before using inverse and leveraged ETFs in their portfolio? Ed?\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-edward-egilinsky-4\"><strong>Edward Egilinsky<\/strong><\/h3>\n\n\n\n<p>If they can handle the risk, that they understand the mechanisms of how leveraged and inverse ETFs work\u2014which is some of the things we touched on today. Those are the key elements there. And if they have a high risk tolerance at the end of the day. So these shouldn&#8217;t be traded by everyone. They&#8217;re only for those short-term active traders that are really monitoring their trading on a day-to-day basis.\u00a0And for those individuals that might be using options, futures, crypto, or probability contracts\u2014those tend to be the same type of traders that gravitate toward leveraged and inverse.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson-5\"><strong>Andrew Wilkinson<\/strong><\/h3>\n\n\n\n<p>How can platforms and educators help investors better understand the nuances of these tools, Ed?<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-edward-egilinsky-5\"><strong>Edward Egilinsky<\/strong><\/h3>\n\n\n\n<p>Yeah, well, Interactive Brokers\u2014we&#8217;ve partnered with you, Andrew, and it&#8217;s a testament to you and your team there. The Trader Academy and the interactivebrokers.com campus have great educational resources, including videos on how leveraged and inverse ETFs work.\u00a0Direxion has a dedicated educational section within our website regarding leveraged and inverse ETFs, and they certainly can go to our website at direxion.com for more details.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson-6\"><strong>Andrew Wilkinson<\/strong><\/h3>\n\n\n\n<p>And we&#8217;ll put that link into the show notes. Ed Egilinsky, Managing Director at Direxion\u2014thank you very much for joining me today.\u00a0<\/p>\n\n\n\n<p><strong>Edward Egilinsky<\/strong>\u00a0<\/p>\n\n\n\n<p>Thanks for having me.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-andrew-wilkinson-7\"><strong>Andrew Wilkinson\u00a0<\/strong><\/h3>\n\n\n\n<p>Alright, and if you enjoyed today&#8217;s podcast, please remember to subscribe wherever you download your podcasts from. Bye for now.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Leveraged ETFs sound exciting; triple the gains, right? Not so fast. In this episode, we unpack the hidden risks, daily compounding effects, and why timing matters more than ever. Whether you\u2019re curious about hedging, short-term plays, or just want to know if these tools belong in your portfolio, this conversation will give you the clarity you need.<\/p>\n","protected":false},"author":111,"featured_media":234511,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[10842,13857],"tags":[5453,20798,20799,20797,20796,20793,20795,18480,18159,9503,47,4595,4594,10995,20794],"contributors-categories":[13701,13576],"class_list":{"0":"post-234510","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-ibkr-podcasts","8":"category-podcasts","9":"tag-active-trading","10":"tag-direxion-etfs","11":"tag-etf-compounding-risk","12":"tag-etf-education","13":"tag-etf-investing-tips","14":"tag-etf-risks","15":"tag-etf-trading-strategies","16":"tag-finance-podcast","17":"tag-financial-podcast","18":"tag-hedging-strategies","19":"tag-ibkr","20":"tag-inverse-etfs","21":"tag-leveraged-etfs","22":"tag-market-volatility","23":"tag-short-term-trading-2","24":"contributors-categories-direxion","25":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.3) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What\u2019s the Catch with Leveraged ETFs? | IBKR Podcasts<\/title>\n<meta name=\"description\" content=\"Leveraged ETFs sound exciting; triple the gains, right? 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