ETFs have earned a strong reputation among ordinary investors, and for good reason. At their best, they are low-cost, tax-efficient, diversified, and easy to own for the long term. A simple broad-market ETF can give investors exposure to hundreds or even thousands of companies at a very low cost, helping them build wealth without trying to pick the next hot stock.
That was the original promise.
But Wall Street has a long history of taking useful financial innovations and stretching them until they become something very different. Today, the ETF wrapper is increasingly being used to package products that are complex, expensive, and often designed more for short-term trading than long-term investing.
One of the clearest examples is the rise of leveraged ETFs.
The appeal is easy to understand. These products often promise two or three times the daily return of a familiar index, sector, stock, or theme. Two times the S&P 500. Three times the Nasdaq. Amplified exposure to whatever happens to be popular.
At first glance, that may sound straightforward. If the investment goes up, you go up more. Of course, the reverse is also true: if the investment goes down, your losses are magnified.
That risk alone is significant. In 2022, for example, QQQ, the Nasdaq-100 ETF, lost about 33%. TQQQ, a three-times daily Nasdaq-100 ETF, lost about 79%. That is the difference between a painful drawdown and a portfolio-altering loss.
But the bigger issue is that leveraged ETFs may not work the way many investors assume.
Most leveraged ETFs are not designed to deliver two or three times the return over your full holding period. They are typically designed to deliver two or three times the daily return of the underlying index. That word — daily — matters.
Because these funds reset every day, their long-term results can differ dramatically from what investors might expect. Once you introduce daily resets, volatility, compounding, and time, the math can start to behave very differently than the marketing suggests.
A leveraged ETF may sound like a simple multiplier. In practice, it is a daily reset machine.
This can create disappointing results even when the market does not crash. In 2018, QQQ was essentially flat, down about 0.13% for the year. A $10,000 investment would have ended the year at roughly $9,987. But TQQQ fell nearly 20%, leaving that same $10,000 investment closer to $8,000.
The market did not need to collapse for the leveraged product to disappoint. A choppy, sideways market was enough.
That is the part many investors miss. Leveraged ETFs can lose badly when markets fall, but they can also lag badly when markets go nowhere. The daily reset structure can create a drag that becomes especially painful in volatile markets.
Then there are the costs.
Traditional ETFs are often associated with low fees, but many complex exchange-traded products carry much higher expenses. These costs may reflect management fees, derivative exposure, financing costs, acquired fund fees, or other structural expenses. From the investor’s perspective, however, the key question is simple: why pay high fees inside a product category many people associate with low-cost investing?
The ETF label only tells you the packaging. It does not tell you whether the product inside is simple, cheap, diversified, or appropriate for a long-term investor.
To be clear, leveraged ETFs are not automatically useless. Sophisticated traders may use them for short-term tactical positions. But that is the key distinction: sophisticated traders, short-term, tactical.
That is very different from long-term investing.
At Hanover, we believe investors should understand the difference between an investment strategy and an investment product. A strategy starts with your goals, time horizon, risk tolerance, tax situation, and actual financial life. A product starts with something to sell.
When Wall Street launches complex products around whatever happens to be popular — AI, crypto, single stocks, leverage, options income, or the next big theme — investors should pause and ask who that product is really built for.
Is it built to help you build wealth over time?
Or is it built to capture your attention, collect a fee, and let you take the risk?
Not all ETFs are built for investors. Some are built for trading. Some are built for speculation. And some exist because once the industry squeezed fees down on boring index funds, it needed somewhere else to make money.