Leverage Works Both Ways

One of the developments that caught our attention heading into 2025, amongst many, was the dramatic increase in participation in leveraged long ETF securities, and the growing spread between leverage long ETFs and leveraged short ETFs.

At its peak, shown courtesy of Bloomberg Intelligence, the spread between leveraged long and leveraged short ETFs had blown out to an astonishing 11:1:

Leveraged ETFs are designed to seek ‘fixed’ multiples of the daily return of an individual security, or sector, or theme.

For example, buyers of the Direxion TSLA Bull 2x Shares ETF, or the Leverage Shares Tesla 3x Tesla ETP, are seeking to reap two times (Direxion) or three times (Leverage Shares) the daily price return of Tesla shares.

Great when, as the saying goes, ‘the going is good’.

Buoyed by abundant liquidity, euphoric consumer sentiment and ebullience over the future of America under the stewardship of Donald and Elon, retail investors scrambled to buy both during the fourth quarter of 2024.

Mom-and-pop South Koreans, known to willingly embrace high risk and volatility in the pursuit of rapid wealth accumulation, led the charge. According to recent filing data, they collectively own 43% of the Direxion TSLA Bull 2x Shares ETF assets, and more than 90% of the Leverage Shares 3x Telsa ETF assets.

The problem: leverage works both ways, meaning already destabilising losses are magnified two or three-fold on the way down. Considering the mechanics of ETF rebalancing, at the time of writing the ETFs are currently down over 70% and 80% respectively.

Those that bought at the peak, and are still HODL (‘holding on for dear life’), now require 233% and 400% price returns from this level just to recover their losses:

A timely lesson on the virtues, and pitfalls, of compounding, depending on how it is utilised.

Born, and minted, on Wall Street. Bought, and buried, in Gangnam.

(Cover Image Source: Joshua Mayo)