Leveraged and Inverse ETFs: A Powerful Double-Edged Sword.

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Introduction

Exchange Traded Funds (ETFs) are often perceived as a low-cost and convenient way to invest in a diversified portfolio. When most investors think of ETFs, they often think of them as a passive investment vehicle that tracks a specific index, such as the S&P 500, Nasdaq, or Straits Times Index.

These types of ETFs are very popular among investors due to their ability to provide broad diversification and reduce the risk of individual stock picking. By tracking a specific index, ETFs offer investors a way to gain exposure to a particular market or sector while minimizing the risk of individual stock picking. However, such broad-based ETFs' performance often tends to move in tandem with their underlying index, which means that an ETF's returns will typically be highly correlated with the performance of its underlying index.

Leveraged and Inverse ETFs

On the other hand, leveraged and inverse ETFs are designed to help investors profit from market movements in ways that traditional ETFs are unable to. Such ETFs are more complex and are usually used for short-term trading due to their relatively higher risks.

Leveraged ETFs aim to amplify the performance of the underlying index or asset they track while inverse ETFs are designed to achieve positive returns when the underlying market or index declines. Often, financial derivatives such as futures contracts, options and swaps are used to enhance returns.

One of the key advantages of leveraged ETFs is that they have no expiration date and do not involve margin calls, unlike options and futures contracts. This makes them a more flexible and convenient investment option, as investors do not have to worry about their positions expiring or being subject to margin calls. Additionally, the potential to multiply your returns without the need to put up higher capital does sound enticing – especially when FSMOne is offering flat processing fees when buying and selling ETFs.

Best Platform for ETFs

Regardless of investment amount, FSMOne is the first and only broker in town which offers you a flat processing fee of S$3.80 for SGX, US$3.80 for US exchanges and HK$38 for HKEX! The same flat fee applies whether you invest $1000 or $100,000. Unlike other brokers that charge platform fee per order and settlement fees on per share basis, at FSMOne all you need to pay is just a LOW FLAT processing fees* for ETF. This make FSMOne the most ideal and cost-effective platform for investing into ETFs.

*Note: Processing fees stated here exclude GST. Exchange-related fees still apply. View our Pricing Structure for more details.

Illustration on returns using Leveraged ETFs

Let’s compare the return of NVIDIA Corp (NASDAQ:NVDA) against its two-times leveraged ETF GraniteShares 2x Long NVDA Daily ETF (NASDAQ:NVDL) on 28^th January this year, one day after Chinese startup DeepSeek caused a selloff on Big Tech firms:

	Previous Closing Price	Closing Price	% Change
NVIDIA Corp	$118.42	$128.99	+8.93%
GraniteShares 2x Long NVDA Daily ETF	$48.41	$56.88	+17.50%

As we can see, NVDL (leveraged ETF) does make almost two times the return of NVDA (actual underlying stock) when the stock rallied. However, while leveraged ETFs can multiply your returns, it can also amplify your losses. We can use another stock and its leveraged ETF to illustrate – Tesla (NASDAQ:TSLA) and Direxion Daily TSLA Bull 2X Shares (NASDAQ:TSLL) on 3^rd February:

	Previous Closing Price	Closing Price	% Change
Tesla	$404.60	$383.68	-5.17%
Direxion Daily TSLA Bull 2X Shares	$26.70	$23.96	-10.26%

Investors who bought the leveraged ETF suffered higher losses than those who owned the stock.

Illustration on returns using Inverse ETFs

Conversely, inverse ETFs enable investors to make positive returns even when markets or the price of the underlying asset experiences a drop in price. Investors often use inverse ETFs as a form short term hedge against market volatility.

To illustrate the impact of inverse ETFs, we shall compare at the performance of NVIDIA Corp (NASDAQ:NVDA) and its inverse counterpart Direxion Daily NVDA Bear 1X Shares (NASDAQ:NVDD) on 27^th January, the trading day of the DeepSeek selloff:

	Previous Closing Price	Closing Price	% Change
NVIDIA Corp	$142.62	$118.42	-16.97%
Direxion Daily NVDA Bear 1X Shares	$6.04	$7.04	+16.56%

The inverse ETF benefitted from NVIDIA Corp’s slide in price and was able to make a return almost equivalent to the drop despite the selloff.

We have shared a few examples of how leveraged and inverse ETFs work. You can make use of our ETF Selector tool find more of such ETFs on our platform with the help of our filters:

Here are some of the popular stocks and ETFs with their leveraged and inverse counterparts:

Name	Stock/ETF	Leveraged ETF	Inverse ETF
Apple	APPLE (NASDAQ:AAPL)	DIREXION DAILY AAPL BULL 2X SHARES (NASDAQ:AAPU)	DIREXION DAILY AAPL BEAR 1X SHARES (NASDAQ:AAPD)
Alphabet (Google)	ALPHABET INC (NASDAQ:GOOGL)	DIREXION DAILY GOOGL BULL 2X SHARES (NASDAQ:GGLL)	DIREXION DAILY GOOGL BEAR 1X SHARES (NASDAQ:GGLS)
Meta	META PLATFORMS (NASDAQ:META)	DIREXION DAILY META BULL 2X ETF (NASDAQ: METU)	DIREXION DAILY META BEAR 1X ETF (NASDAQ:METD)
Amazon	AMAZON.COM (NASDAQ:AMZN)	DIREXION DAILY AMZN BULL 2X SHARES (NASDAQ:AMZU)	DIREXION DAILY AMZN BEAR 1X SHARES (NASDAQ:AMZD)
NVIDIA	NVIDIA CORP (NASDAQ:NVDA)	GraniteShares 2x Long NVDA Daily ETF (NASDAQ:NVDL)	Direxion Daily NVDA Bear 1X Shares (NASDAQ:NVDD)
Tesla	TESLA (NASDAQ:TSLA)	Direxion Daily TSLA Bull 2X Shares (NASDAQ:TSLL)	DIREXION DAILY TSLA BEAR 1X SHARES (NASDAQ:TSLS)
Microsoft	MICROSOFT CORP (NASDAQ:MSFT)	DIREXION DAILY MSFT BULL 2X SHARES (NASDAQ:MSFU)	DIREXION DAILY MSFT BEAR 1X SHARES (NASDAQ:MSFD)
Magnificent 7	ROUNDHILL MAGNIFICENT SEVEN ETF (BATS:MAGS)	ROUNDHILL DAILY 2X LONG MAGNIFICENT SEVEN ETF (BATS:MAGX)	ROUNDHILL DAILY INVERSE MAGNIFICENT SEVEN ETF (NASDAQ:MAGQ)
Semiconductor	VANECK SEMICONDUCTOR ETF (NASDAQ:SMH)	DIREXION DAILY SEMICONDUCTOR BULL 3X SHARES (NYSE:SOXL)	DIREXION DAILY SEMICONDUCTOR BEAR 3X SHARES (NYSE:SOXS)

Conclusion

While leveraged and inverse ETFs can be valuable tools for investors looking to take advantage of short-term market movements, they are generally not recommended for long-term portfolios due to their inherent risks and complexity. These ETFs are designed for short-term trading and are subject to daily rebalancing, which can lead to significant tracking errors over extended periods. In the long run, the compounding of daily returns may result in performance that diverges from the intended leveraged or inverse exposure, especially in volatile or sideways markets.

For a long-term, holistic investing goal, we recommend that investors stick with core ETFs and unit trusts. Click on the respective link if you wish to find out more on our ETF Focus List and Recommended Funds.