Leveraged exchange-traded funds are funds designed to give investors multiples of the daily return of an asset, using swaps and futures contracts. They now manage around $100bn. Leveraged ETFs are predominantly an American phenomenon.
The first ETF was listed at the Toronto Stock Exchange in 1990. For most of their history, ETFs held straightforward assets like equity indices, reducing the cost of passive investing. The past few years have seen rapid expansion of more complicated products. In the first four months of 2025 alone, 340 ETFs were launched in America, around 50% more than during the same period in 2024. Examples include funds offering triple the inverse of the daily return of bank shares, leveraged exposure to individual chipmakers like Nvidia, and twice the daily return of Trump Media & Technology Group.
Leveraged ETFs charge fees approaching those of hedge funds, far higher than their low-cost forebears. They tend to make markets more volatile, since they often cause large bouts of buying and selling at the end of trading days to maintain their promised return multiple.
A deeper risk involves the mechanics underpinning all ETFs. When an ETF's price diverges from the value of its underlying holdings, financial institutions (often hedge funds) create and redeem shares to close the gap. Recent volatility has produced uncomfortably large gaps, particularly where the underlying assets were illiquid loans. More complex products and continued volatility could test this arbitrage mechanism further.
Paul Atkins, the SEC chairman under Donald Trump, is expected to be amenable to further growth in speculative ETFs, especially those investing in cryptocurrency.
He was so narrow-minded he could see through a keyhole with both eyes.