Business Trial Group Investigates Leveraged ETF Losses

Leveraged exchange-traded funds present many more risks than ordinary ETFs.  A leveraged ETF’s losses in a down market may dwarf those of its underlying index. At the Morgan & Morgan Business Trial Group, we are investigating the massive losses that leveraged ETFs have recently incurred.   

An ordinary ETF typically holds a basket of investments (such as common stocks) that tracks the underlying index’s performance on a 1:1 ratio. So if the underlying index increases in value by 1 percent, then the ordinary ETF also should achieve a 1 percent return.  And the same holds true if the underlying index decreases in value by 1 percent — the ordinary ETF likewise should lose 1 percent.

By contrast, a leveraged ETF uses debt and derivatives to augment returns on the underlying index at 2:1 or 3:1 ratios. For example, assume a leveraged ETF uses the S&P 500 as its underlying index, and uses debt and derivatives to augment returns three-fold.  When the S&P 500 increases in value by 1 percent, then the leveraged ETF should increase in value by 3 percent. But when the S&P 500 decreases by 1 percent, the leveraged ETF can experience a 3 percent decrease in value – or more. The loss may exceed 3 percent because leveraged ETFs have to rebalance their portfolios daily, which can further exacerbate losses in a down or volatile market.  

In sum, while leveraged ETFs produce out-sized gains when the underlying index increases in value, they can produce massive losses in bear or volatile markets. For this reason, leveraged ETFs are suitable only for the most speculative of investors.  

If you have experienced large losses in a leveraged ETF, the experienced securities attorneys at the Morgan & Morgan Business Trial Group are here to help. 

Morgan and Morgan’s securities attorneys are part of the firm’s Business Trial Group.  The Business Trial Group helps investors recover their monetary losses on a contingency basis. We are only paid if we successfully recover money for you. We regularly fight for justice against brokerage firms, investment advisory firms, and banks, and have helped investors recover tens of millions of dollars of investment losses. 

The Business Trial Group is part of the largest contingency law firm in the nation, with more than 700 lawyers and offices nationwide.