What is a leveraged ETF?

A leveraged ETF is a type of exchange-traded fund that tracks a stock market index, industry, or other asset class—but with a twist: it uses borrowed money (debt) to try to boost returns. This means the gains can be bigger, but the risks are higher too, so it’s important to understand what you’re investing in.

Unlike regular ETFs, which simply aim to match the performance of an index or asset, leveraged ETFs try to deliver daily returns that are multiples of that performance. Fund managers use debt to amplify these returns, hoping the extra gains outweigh the cost of borrowing.

Some leveraged ETFs also use derivatives, like options and futures, to increase potential returns even further. There are also inverse leveraged ETFs, which are designed to go up when the underlying index or asset goes down. These are for investors who expect a market drop and want to profit from it, similar to “short selling.” Inverse leveraged ETFs can also aim to provide multiple times the opposite of the daily performance.

Leveraged ETFs can offer big rewards, but they come with high risk and are generally best suited for experienced investors who understand daily market movements.