When it comes to ETFs, many investors believe they offer two key advantages: diversification and long-term outperformance. However, equating ETFs with simple "buy-and-hold" strategies for commodities like oil or gold can lead to costly misunderstandings. Let’s debunk four critical myths about leveraged and inverse ETFs.
Myth 1: Are They Simple and Low-Cost?
Contrary to popular belief, leveraged and inverse ETFs are neither simple nor inexpensive to trade.
Key differences:
- Prototype ETFs invest in baskets of stocks
- Leveraged/inverse ETFs use futures contracts to simulate 2x, 3x, or inverse returns
The hidden costs:
- Frequent futures contract rollovers create "volatility decay"
- Daily rebalancing erodes returns over time
- Management fees are typically higher than traditional ETFs
As ETF expert Osman points out: "A 3% market drop doesn’t guarantee a 3% gain in inverse ETFs over extended periods."
Myth 2: Ideal for Long-Term Holding?
These ETFs are designed for short-term plays, not retirement accounts.
Why they fail as long-term investments:
- Futures contracts have expiration dates
- Compounding effects distort target returns over time
- Rising costs gradually diminish net asset value
Investment guru Chen Chongming advises: "Never hold leveraged/inverse ETFs beyond six months—the structural costs become prohibitive."
👉 Discover smarter ETF strategies
Myth 3: Can You Skip Stop-Loss Orders?
While traditional ETFs allow dollar-cost averaging, leveraged products demand strict risk management:
Critical precautions:
- Set stop-loss at 5-8% of position value
- Avoid "doubling down" on losing positions
- Remember: A 20% market drop could wipe out 40% in 2x leveraged ETF
"Five-fold leverage means 10% drops trigger margin calls," warns Osman. "Without stops, you’re playing with fire."
Myth 4: No Risk of Going to Zero?
Recent market turmoil disproved this dangerous assumption:
2020’s close calls:
- Fubon VIX: Nearly delisted as NAV approached $2 threshold
- Yuanta S&P Oil 2x: Saved by regulatory intervention but remains high-risk
Delisting triggers:
- NAV below 10% of issuance price for 3 consecutive days
- Assets under $2M USD equivalent
FAQ: Your Leveraged ETF Questions Answered
Q: Can leveraged ETFs really deliver 2x long-term returns?
A: No. The "2x" applies only to daily movements. Volatility decay prevents sustained multiplier effects.
Q: When should I consider inverse ETFs?
A: Primarily for short-term hedging during anticipated market corrections—not as permanent portfolio fixtures.
Q: What’s the biggest mistake with these products?
A: Treating them like traditional ETFs. They’re specialized trading instruments requiring active monitoring.
Q: How much portfolio allocation is safe?
A: Experts recommend keeping leveraged/inverse ETF exposure below 5% of total investments.
👉 Master advanced ETF techniques
Remember: Leveraged and inverse ETFs can be powerful tools when used correctly—but deadly when misunderstood. Always match the instrument to your investment horizon and risk tolerance.