INSUBCONTINENT EXCLUSIVE:
Exchange-traded funds that use leverage to offer double or triple the daily return of benchmark U.S
stock indexes rank among the 10 top-performing funds of the decade, with returns that in some cases neared 2,000%, despite warnings that
they are not suitable for most investors.
The huge gains for leveraged ETFs reflect the benefits of betting on growth during the longest
But they also highlight the subtle ways in which record-low volatility bolstered investors.
High volatility hurts leveraged ETFs by adding
costs to the daily rebalancing trades necessary to maintain leverage.
Fund experts and analysts caution that the outsized returns for
leveraged funds may not be repeated in the decade ahead.
"This was virtually the perfect decade
You had very low volatility, very low borrowing costs, and above-average market returns," said William Trainor, a professor at East
Tennessee State University who specializes in the study of leveraged ETFs.
While leveraged funds will outperform other options in the decade
ahead, Trainor said, rising borrowing costs over the next 3 to 4 years will likely weigh on possible gains.
"I don't think we will see the
returns that we've seen again," he said.
The Direxion Daily Technology Bull 3X ETF, for instance, returned nearly 1,920% between the start
of 2010 through November of this year, according to Morningstar data, the biggest gain among the roughly 10,000 mutual funds and ETFs
available in the United States
The ProShares Ultra QQQ, which offers two times the daily return of the Nasdaq 100 index, posted the second-best return with a nearly 1,330%
gain over the decade.
The top actively managed US stock fund over the decade, by comparison, gained 441%, led by the Virtus KAR Small-Cap
Growth fund, the Fidelity Select Retailing fund, and the Berkshire Focus fund.
Despite their outperformance, leveraged funds remain more
suitable for tactical investors such as hedge funds than long-term investors, said Todd Rosenbluth, director of ETF and mutual fund research
at CFRA.
"You can be very, very right or very, very wrong [with the use of leverage] and that can also reverse itself relatively quickly,"
he said.
Investors in exchange-traded notes that made leveraged bets on volatility, for instance, suffered one-day losses of 90% in
February, 2018, after the Dow Jones Industrial Average plunged
Approximately $35 billion in assets is invested in leveraged ETFs and mutual funds, according to Refinitiv Lipper data, with most investors
holding the funds for only a few days or weeks at a time.
Robert Nestor, president of leveraged-fund provider Direxion, said that the firm
is expecting much of its growth to come in providing funds with no net leverage that appeal to longer-term investors interested in issues
such as ESG, a catch-all term for investing in companies that focus on environmental, social, and governance issues.
"We're looking at
things that are relevant to other big pockets of assets and investors that don't have or want high levels or leverage," he said.