Breaking down leveraged and inverse exchange-traded products

E*TRADE from Morgan Stanley



  • 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.
  • They 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. 

What are leveraged and inverse exchange-traded products?

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.

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 strategies.

Always keep in mind that when held for longer than one day, the perfomance of leveraged ETPs can significantly decrease.

Investing in leveraged and inverse ETPs

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. 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.

Pros and cons to consider

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. 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.

The bottom line

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. Those who choose to invest in leveraged or inverse ETPs should use extreme caution.

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

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