Market conditions are improving for these volatile ETFs.
One of the most popular types of ETFs right now are leveraged ETFs, which have been gathering billions in inflows during this uncertain and volatile market environment.
In April, leveraged ETFs brought in $10.95 billion in inflows, the highest amount since March 2020 when the COVID pandemic hit, according to LSEG Lipper data. In March, leveraged ETFs saw $9.2 billion in inflows, the most, at the time, since 2020.
Further, a recent analysis by JP Morgan Asset Management revealed that a spate of new leveraged ETFs have hit the market this year, making them one of the most popular among new ETF issuances.
What are leveraged ETFs and why are they gaining popularity?
Amplifying returns – and losses
Leveraged ETFs seek to leverage futures and derivatives to amplify the gains for a fund by two, three, or even four times. So, a 2X leveraged ETF would generate two times the gain of the underlying benchmark or investment, while a 3X leveraged ETF would generate 3X the return, etc. However, the reverse is true because if the benchmark goes down, the losses would be amplified by two, three, or four times.
Leveraged ETFs can be invested in an index, like the Nasdaq or S&P 500, a sector, or even in an individual stock. Apple, Google, and Tesla are just some of the tech names that are the focus of leveraged ETFs.
Through the first four-plus months of the year, many tech-focused leveraged ETFs, like the Direxion Daily Semiconductor Bull 3X Shares ETF (NYSEARCA:SOXL) are down big, about 31% as of May 14. But those focused on hot sectors or investments, like utilities or gold, are surging. For example, the Direxion Daily Junior Gold Miners Index Bull 2x Shares ETF (NYSEARCA:JNUG) is up 74% YTD.
Obviously, these are much more volatile investments that investors should use cautiously and only as a fraction of a diversified portfolio.
Why they are in demand right now
The reason why they have become more sought after in recent months is due the stock market bottoming out, particularly tech stocks, with the expectation that it will rally.
This week, some major Wall Street analysts raised their targets for the S&P 500, based, in part, on what they expect to be a rally for tech and AI stocks.
“Several factors could result in a significant inflow into leveraged equity ETFs,” Eugenia Mykuliak, founder and executive director of B2PRIME Group, a global financial services provider for institutional and professional clients. “One of them is the anticipation of interest rate cuts. Even though at the previous Fed meeting, Jerome Powell expressed doubts about potential rate cuts up to early 2026 or his retirement, investors speculate that easing policies may still be on the horizon.”
Mykuliak explained that when interest rates drops, investors tend to move their capital into growth-oriented sectors such as tech. She also cited the 90-day pause in tariffs between the U.S. and China as a key driver for the uptick in leveraged ETF activity. Semiconductor and tech companies heavily rely on supply chains, so this pause will better-positioned them for growth.
“One more driver behind this sharp uptick — strategic hedging,” Mykuliak said. “While a strong performance of major tech companies is observed, some investors may use leveraged ETFs to enhance short-term upside exposure while managing downside risk without cutting core equity positions. This could help them to adjust the risk-reward balance tactically.”
Mykuliak added that investing in leveraged ETF is often speculative and focused on the short-term.
“The speculative nature can’t be ignored,” Mykuliak said. “Short-term mindset is typically about speculation because positions are held for days, not months. So, chasing short-term profits is a speculative approach per se. The rising activity around options and other derivatives of these ETFs could also signal about speculative positioning, rather than long-term strategic preparation.”
