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Investors lost $25.7 billion in leveraged exchange trading funds late last week. This has been lost in the biggest meltdown of history in recent years due to high-risk funds that have attracted a large influx of retailers seeking quick returns.
According to calculations by FactSet, high-octane funds that expand the daily returns of individual stocks or indexes up to five times lost almost a quarter of their value on Thursday and Friday, when Donald Trump’s trade war and unraveling financial markets.
This overturned the previous worst loss on record, the ETFs that leveraged two days during the March 2020 Covid-19 crash, losing $9.1 billion and $5.6 billion respectively, and the 2018 “Volmageddon,” where an extreme surge in volatility caused huge losses for short volatility ETFs.
Global stock markets lined up Thursday through Monday through Monday for a wave of so-called “mutual tariffs” on dozens of US trading partners to take effect on Wednesday.
The plan adds to the 10% universal tariffs announced last week on Trump’s “Freeing Day.”
The loss highlights the risks of retail investors in the fast-growing sector, which has swelled to more than 650 funds worldwide since its introduction in 2006.
“These products are very sharp knives,” said Elizabeth Kaschner, director of FactSet’s Global Fund Analytics. “They should be used for a very specific purpose, and the people who use them need to know what they’re doing.”
According to FactSet, the largest percentage loss was choked up by Ireland-based leveraged stocks four times longer.
Three other leveraged stock ETFs (5x epic 7, 3x Boeing and 3x arms) lost over 50%.
In dollar terms, the biggest loser of the leveraged ETF was the $200 billion US-listed ProShares Ultrapro QQQ, based on the technology-heavy NASDAQ index that lost $6.3 billion.
“It’s really about semiconductors and technology, and the biggest percentage losses are in a single stock ETF,” Kashner said. “Some people did a great job of losing money.”
The US has the largest market for leveraged ETFs, but leverage is limited to triple, with losses limiting fractions. There is no suggestion that any of the ETFs did not work as intended.
Kenneth Lamont, research principal at Morningstar, said retail investors are particularly susceptible to sudden losses from such high-risk products. “They don’t have all the benefits of a big institution and they may not have an edge, so having a product that allows them to triple down on their bets may not be the best idea,” he added.
