By Ian Salisbury

Leveraged exchange-traded funds offer investors a tantalizing promise -- doubling the daily returns of some of the market's hottest stocks like Tesla and Nvidia. Lately, they have been missing their goal, according to a new Morningstar report.

The shortfall may be costing investors billions.

Leveraged ETFs use complex derivatives like swaps contracts to offer investors magnified bets on an index or, increasingly, on a single stock. Many offer to double the target's daily returns -- although some offer to boost exposure just 1.5 times or up to three times. Some of these ETFs help investors short, or bet against, the target.

These funds have been one of the hottest trends in the fund world in 2025, with investment firms launching 170 new leveraged ETFs in the first nine months of 2025, according to researcher VettaFi. That's about one quarter of all new ETFs.

Leverage ETFs have long been controversial, in part because of the heightened risk, and partly because leveraged funds' long-term returns tend to deviate wildly from those of the stock or index they target when looking at periods longer than one day. Over weeks or months, bullish leveraged ETFs can deliver negative returns -- even if the target stock or index is up.

It's a discrepancy fund companies have tried to clear up by putting "daily," in the names of funds. All the same, Barron's has warned investors to steer clear of these complicated and volatile investment options in the past.

Morningstar's new research suggests a number of single-stock ETFs -- including ones following popular names like Tesla, Nvidia, Palantir, and Coinbase -- are having trouble delivering even their stated goal of doubling single-day returns.

For instance, Morningstar singles out the Direxion Daily TSLA Bull 2X Shares. With more than $7 billion, it's the largest single-stock leveraged ETF by assets. Since the fund launched in 2022, on days Tesla rose, the fund has captured just 1.91 times Tesla's price move rather than two times. Conversely, on days when Tesla's shares have fallen, the fund captured 2.12 times the stock's price move.

Direxion couldn't immediately be reached for comment. It is worth noting the company's website provides an extensive education section, including a 30- to 60-minute online course. It says the funds are intended only for those who understand their "unique nature and performance characteristics."

Morningstar attributed leveraged funds' return shortfalls to the cost of swap contracts, which have increased in recent years, thanks to higher short-term interest rates.

While daily shortfalls were small, Morningstar analyst Jeff Ptak estimated they have ultimately cost holders of the Tesla fund more than $700 million since its inception. Similar funds have faced similar issues, costing traders a total of around $3.3 billion since their launches, Ptak estimates.

It's yet another reason investors should be wary of these complex, frustratingly unpredictable investment products.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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November 07, 2025 13:14 ET (18:14 GMT)

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