Yesterday’s Tech Rout Shows How Leveraged ETFs Can Destroy Wealth

The stock market has rewarded risk-taking for much of the past three years. Artificial intelligence spending continues to fuel demand for technology stocks, semiconductor companies have generated outsized gains, and investors have increasingly looked for ways to amplify their returns. That search for bigger profits has fueled a surge in leveraged exchange-traded funds (ETFs).

As long as markets move higher, leveraged ETFs can look like a shortcut to wealth. Yesterday’s technology sell-off offered a reminder that they can also accelerate losses just as quickly. The lesson for investors is simple: leverage works both ways.

Leveraged ETFs Are Growing at a Record Pace

According to a recent Reuters report, leveraged single-stock ETFs now account for roughly 8% of total U.S. exchange trading volume. The growth has been rapid, with 275 leveraged single-stock ETFs launching since January 2025 alone.

Investors have piled into products designed to magnify returns from some of the market’s hottest sectors.

According to the Financial Times using data from S&P Capital IQ, assets under management in several popular leveraged funds have surged since April:

The growth has been remarkable. Assets in SOXL have more than tripled since April, while TQQQ’s assets have nearly doubled. QLD added approximately $7 billion in assets during the same period, representing growth of 88%.

As a result, total U.S. leveraged ETF assets have climbed to a record $198 billion, up 55% in just a few months. Investor leverage is reaching record levels at precisely the time market valuations remain elevated and volatility is increasing.

How Leveraged ETFs Actually Work

A leveraged ETF seeks to deliver a multiple of an index’s daily return. A 2x fund attempts to produce twice the daily gain or loss of its benchmark. A 3x fund aims for three times the daily move.

If the Nasdaq-100 rises 1% in a single day, TQQQ seeks to gain approximately 3%. If the index falls 1%, the fund aims to lose about 3%. The key word is “daily.”

Leveraged ETFs reset and rebalance every trading day. They use derivatives, swaps, futures contracts, and borrowed money to maintain their target exposure. That daily rebalancing means long-term returns often diverge from what investors expect. In volatile markets, gains and losses compound in ways that can erode performance even if the underlying index eventually recovers.

That’s why fund prospectuses consistently describe these products as trading vehicles rather than long-term investments.

Yesterday’s Sell-Off Shows the Danger

The risks became clear during yesterday’s market decline. As tech stocks were routed, the Dow Jones Industrial Average finished roughly flat, while the S&P 500 declined 1.4%. Even the tech-heavy Nasdaq-100 only fell 2.2%.

Yet the damage was much worse in semiconductors. The PHLX Semiconductor Index dropped 7.9% as technology stocks sold off around the world. For holders of SOXL, though, the losses were magnified dramatically. The fund plunged more than 23% in a single session because it seeks to deliver three times the daily performance of semiconductor stocks.

That is leverage in action. A 7.9% decline is painful enough. A 23% loss requires a subsequent gain of nearly 30% just to break even.

Sure, leveraged ETFs can generate eye-popping returns during powerful bull markets. That is exactly why investors continue pouring money into them. But markets do not move in straight lines forever. Extended downturns, bear markets, or prolonged volatility can wreak havoc on leveraged products. Multiple consecutive declines can rapidly shrink portfolio values and make recovery increasingly difficult.

Key Takeaway

In short, leveraged ETFs are designed for traders, not investors. Products such as TQQQ, SOXL, and QLD can be effective tools for short-term market bets, but their daily rebalancing and amplified exposure make them poor candidates for buy-and-hold portfolios. Yesterday’s technology sell-off provided a textbook example of why.

Regardless of how bullish investors remain on artificial intelligence, semiconductors, or technology stocks, leverage magnifies losses just as efficiently as gains. The recent explosion in leveraged ETF assets suggests many investors are focusing on the upside while overlooking the downside.

In the end, smart investors should remember that successful long-term investing is usually about compounding returns steadily over time, not tripling every market move and hoping volatility stays friendly.