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Investors lost $25.7bn in leveraged exchange traded funds late last week, in the biggest ever meltdown for risky funds that have drawn huge inflows in recent years from retail traders seeking quick returns.
The high-octane funds, which magnify the daily returns of individual stocks or indices by up to five times, lost almost a quarter of their value on Thursday and Friday as they were hit by Donald Trump’s trade war and the unravelling of financial markets, according to calculations by FactSet.
This eclipsed the previous worst losses on record, two separate days during the March 2020 Covid-19 crash when leveraged ETFs lost $9.1bn and $5.6bn respectively, and the “Volmageddon” of 2018 when an extreme surge in volatility led to large losses for short volatility ETFs.
Global stock markets tumbled over three trading days from Thursday to Monday after a wave of so-called “reciprocal tariffs” against dozens of the US’s trading partners was lined up to take effect on Wednesday.
The plans are in addition to a universal tariff of 10 per cent announced on Trump’s “liberation day” last week.
The losses underline the risks for retail investors in the fast-growing sector, which has ballooned to more than 650 funds worldwide since their introduction in 2006.
“These products are very sharp knives,” said Elisabeth Kashner, director of global fund analytics at FactSet. “They are to be used for very specific purposes and the people that use them have to know what they are doing.”
The biggest percentage loss was chalked up by the Ireland-based Leverage Shares 4x Long Semiconductors ETP, which haemorrhaged 59.1 per cent over the two days, according to FactSet.
Three other Leverage Shares ETFs — 5x Long Magnificent 7, 3x Boeing and 3x Arm — lost more than 50 per cent.
In dollar terms, the biggest loser among leveraged ETFs was the $20bn US-listed ProShares UltraPro QQQ, based on the technology-heavy Nasdaq index, which lost $6.3bn.
“It’s really all about semiconductors and tech and the biggest percentage losses are in single stock ETFs,” said Kashner. “Some did a magnificent job of losing money.”
Although the US has by far the largest market for leveraged ETFs, leverage is capped at three times, limiting losses a fraction. There is no suggestion that any of the ETFs failed to behave as intended.
Kenneth Lamont, principal of research at Morningstar, said retail investors were particularly susceptible to sharp losses from such high-risk products. “They don’t have all the advantages of a big institution and the chances are that they don’t have an edge, so having a product that allows them to triple down on their bet maybe isn’t the best idea,” he added.