Breaking down leveraged and inverse exchange-traded products

• Leveraged and inverse exchange-traded products (ETPs) are complex investments that may provide amplified gains, but also substantial losses.
• Generally, leveraged and inverse ETPs are not intended to be held longer than one day.
• Both carry significant risks and generally have higher management fees and expenses than traditional ETPs.
• Leveraged and inverse ETP performance can also be drastically different than the stated performance objectives, if held longer than one day.
• Before investing in leveraged or inverse ETPs, you should fully understand how they work and read the prospectus and other offering documents.

This article is for educational purposes only and is not a recommendation or investment advice regarding leveraged or inverse ETPs.

Leveraged and inverse exchange-traded products (ETPs) are considerably different than traditional exchange-traded products. They come with unique risks that investors should be aware of before incorporating them into their portfolios.

Leveraged ETPs are designed to amplify the daily movement of a benchmark or single security. Inverse ETPs aim to replicate the daily movement in the opposite direction. An inverse ETP might strive to multiply a benchmark or single security’s performance in the opposite direction, making it a leveraged inverse ETP.

Some leveraged and inverse ETPs provide exposure to a single security rather than a diversified index or basket of securities. These single-stock leveraged and inverse ETPs seek to magnify, or provide inverse exposure to, the daily performance of one company’s stock. Because they are tied to a single security, they are not diversified and may experience especially pronounced volatility.

When considering the differences between leveraged and inverse ETPs and traditional ETPs, it is important to highlight that leveraged and inverse funds use derivatives and other leveraged and/or complex strategies to achieve their investment objectives.

Always keep in mind that when held for longer than one day, the performance of leveraged ETPs can significantly decrease. The same holding-period risk applies to inverse and leveraged inverse ETPs. Their returns can differ significantly from the performance, or inverse performance, of the underlying index, benchmark, or single security over the same period.

These ETPs are complex and should be monitored daily, so they are not a good choice for novice investors or long-term investors with buy-and-hold strategies. They are generally intended for experienced and aggressive investors who understand the risks and are able to actively manage their investments on a daily basis. While some investors mistakenly believe a leveraged or inverse ETP multiplies the long-term performance of an index or single-security—or the inverse of an index or single-security—leveraged and inverse ETPs generally only seek to multiply such performance over just one day. Significant losses can result if they are not managed properly or held for longer than one day. Over the long-term, leveraged and inverse ETPs typically do not perform the same as the multiple or inverse return of their stated benchmark or single-security.

Investors should also understand that losses may be substantial and could include the loss of the entire amount invested.

Although E*TRADE from Morgan Stanley may identify these products on its platforms and provide educational information about them, this information does not constitute investment advice or a recommendation regarding leveraged or inverse ETPs. Investors are responsible for making their own investment decisions and determining whether a product is appropriate for their account.

One feature of leveraged ETPs, if monitored carefully, is that they allow an investor to get more exposure to market movements without investing more money.

Inverse ETPs, again with careful monitoring, can be used to profit from or hedge existing positions during market declines without employing shorting strategies.

However, both leveraged and inverse ETPs have several significant potential downsides to consider, including the risks described above relating to holding leveraged and inverse ETPs for longer than one day, as well as unique risks from added leverage, which generally increase volatility. The longer an investor holds an inverse or leveraged ETP, the greater the chance of potential loss given their volatile nature. These ETPs may also suffer from lower liquidity. Greater volatility can contribute to market dislocations, trading restrictions, product liquidations, or circumstances in which an investor may be unable to sell the product or may have to accept a discounted price. Additionally, fees, costs, and taxes tend to be higher because the funds require more frequent trading, which can cut into an investor’s profits.

Also, ETP investors buy and sell shares of the products on exchanges, as opposed to transacting with the product itself. As a result, ETP investors are exposed to the risk, among others, that the market price of an ETP’s shares will not be equivalent to the daily net asset value (NAV) of the ETP’s shares.

Investors should also distinguish between exchange-traded funds and exchange-traded notes. Exchange-traded notes may present additional and distinct risks from exchange-traded funds.

Investors who use these ETPs should fully understand how they work, including all the material risks, and why they are using them.

Read the fund's prospectus, including details on its objectives, investment strategies, costs, and risks, before you make an investment decision. Investors should also review other applicable offering documents and product disclosures. Those who choose to invest in leveraged or inverse ETPs should use extreme caution.

Leveraged and inverse ETPs are complex products that involve heightened risk, may not be appropriate for most investors, and generally require daily monitoring.

To learn more about Leveraged and Inverse Exchange Traded Products, explore these resources from FINRA and the SEC.

Web Search References:

¹ Leveraged/Inverse Products Acknowledgment - us.etrade.com

CRC# 5791309 08/2026