So What is Wrong With Leveraged ETFs? I don't get it?
Hi guys I got some questions, thoughts and ideas about leveraged ETFs and wanted to share them:
The Objective Performance Gain:
So my ETF of choice that most of my money is in, is DHHF. But then I learnt about GHHF, which is a leveraged version of it. Since its inception in 2024, GHHF has averaged an annual return of 21.62%, whereas DHHF has averaged an annual return of 15%. So clearly GHHF has performed better, in this time. Obviously, this was a small sample size and didn't include that many downturns. Then I looked at another leveraged fund called GGUS which is the levered version of the S & P 500 and has been around for a much longer time. If you look at the last 10 years, GGUS was up 21.81% and S & P 14.92%. That sounds familiar doesn't it (pretty much the same difference as the GHHF/DHHF split earlier). Therefore, there is no logical conclusion that these funds don't provide greater return based on historical numbers.
Some of the common criticisms that I have seen on the risk of levered funds which I don't agree with because of these reasons (again I'm not that smart, this is just my personal observations, please comment if my reasoning is incorrect cause I don't get why people are so scared of these funds):
- Risk of fund going bust during a downturn - From what I understand this is more a problem for smaller funds (which GHHF isn't) and this fund is not that levered (1.4-1.6 leverage), so this is much less of a concern/pretty much impossible. From my understanding, lets say it is a 1.6 leverage, then about a 60% downturn would be required for the fund to break (60*1.6) = 96% (so a bit more than 60% but you get the point). I also noticed that there hasn't been a 60% downturn in the market in 100 years (last was Great Depression), so clearly this is a risk, but a small one for sure, and maybe you sell before it if that much of a tragedy is likely to occur. So to me this seems unlikely, especially given modern financial systems must have improved from 100 years ago. => also GHHF does auto rebalancing which can lower the leverage to bottom of the range during downturns to around its bottom of 1.4, this would require an even bigger downturn of 70% (make up your mind if this is possible nowadays)
- Management fees - GHHF has a higher management fee than DHHF which is 0.35% to 0.19%. If you consider the superior returns so far, this is completely negligible and you will get higher returns with leverage based on both my examples of GHHF and GGUS even including the management fee.
- Volatility/rebalancing - So a lot of people say it is more volatile and requires rebalancing which can lower returns. While this is true, in spite of that, it is clear that both GHHF and GGUS have outperformed the market, and I have done a lot of research on this and most levered funds tend to outperform unlevered funds. This introduces the golden rule of levered investing => never sell/don't be affected psychologically by downturns. The idea here is even if you see a 15% loss rather than 10% loss due to leverage, this actually is not the end of the world, because you just saw a 15% instead of a 10% gain in the past. In my opinion, I would not be moved by these downturns cause I know this is normal, you can simply create a "new normal" in your head and be unaffected by downturns. I know this is not for everyone, but I'm certain this is possible and I don't think I'd be very affected by this kind of downturn as I know this is bound to happen (if you expect it, it can't hurt you as bad), and eventually you will outperform the market (e.g. GGUS and GHHF). As I said before, your returns are also magnified. A main concept why I think levered funds is absolutely dangerous for less patient/scared investors is the idea of loss-aversion, humans tend to more scared of losses compared to satisfaction of a similar gain, meaning they want to sell much earlier when they see a huge loss, it's like an impulse. I think if you are an investor worth your salt, this is stupid. I come from a value investing mindset, and the intrinsic value has not reduced during a downturn, only macro conditions have temporarily changed the price so why on earth would you consider selling it when the business is likely the same quality => me personally I'll never truly understand the people that see a loss and want to sell (and the business has not materially changed), like you are not cut out for investments if that is the case.
- Huge potential during dips - My biggest case for levered funds is this. If you notice a significant dip in the market, surely it is time to start investing in levered funds, but of course timing is important and a certain strategy is required. Again, this is dependent on the context e.g. I think most people could tell the COVID dip would be far more greater than the 2026 Jan-Mar dip due to Iran-US war, one is clearly simply more existential than the other. Therefore, the strategy during COVID is perhaps DCA'ing the dip across a longer period of the dip e.g. invest some at 10% down, then some at 20% down etc, whereas Iran-US War, you can kind of DCA or just do lump-sum once you see a significant decline (clearly this is more of a temporary, less impactful event). The major risk of buying during the dip is the exposure to even bigger losses that are magnified by leverage. However, by DCA'ing e.g. invest 25% of money at 10% down, then 25% more at 20% down and so forth, you cover some risk off and then you can gain huge returns when the market starts to go back up which are also magnified by 1.5x (in the case of GHHF)
- Interest Rate Risk - I also think, if there is a time where there are low interest rates and there is a huge dip, this is even better since you are combining less leverage costs with maximum gains from a market recovery. An interesting note has been that interest rates have risen in Australia across recent history and in the last 6 months it has been very high. In this time, GHHF has gained 10.23%, whereas DHHF has gained 7.28%. This means that even under bad market conditions such as heightened interest rates, levered funds have still performed considerably better when leverage could be potentially more expensive.
- Time Horizon - The final aspect that I think is very interesting with levered funds, perhaps which is an antithesis to traditional index funds is time horizon. In the context of the buying of the "huge dip", the time horizon for this strategy is not "your whole life" like most index funds, it would only be 6 months - 12 months until recovery finishes, but you can make such significantly greater returns. Therefore, there is this argument that levered funds can be kind sort of a "riskier growth index fund/stock" rather than a "safe, lower growth, diversified ETF" during market dips, which again is the antithesis of index investing, ensuring a higher return in a shorter period of time. Now, the main concern I have for this strategy is opportunity cost. You see, during a market downturn tech/AI/low-mid cap stocks tend to have the biggest declines, usually greater than the index fund decline, therefore the cost is that you may as well just invest in these stocks instead of a levered fund like GHHF. However I still do think these stocks contain more risk than investing in a levered fund, as levered funds still maintain the whole market as their equities rather than one stock. The difference here is that GHHF gets best of both worlds during a market recovery: diversified holdings (e.g. removing the risk of some companies literally going bust cause they can't recover, as they simply hold all companies so it doesn't matter as much) and maximising returns (recovery guarantees greater returns and therefore you are x1.5 your returns in a market where it is more than likely it will go up).
I'm sure there are some more points to consider, but given this I see a very legitimate argument to investing in levered funds, particularly during significant dips in the market. Now full disclosure, I don't invest in levered funds yet, but I have done some research on it over the past hour (lol) and I'm convinced that it is not bad of an option particularly if you are someone like me (23 - with a longer time horizon and can take on more volatility or risk for higher return). I think as an older person, this is less feasible simply because a market downturn of lets say 30% is 45% and what if you need that money in 3 months for retirement, that might not be enough time to regain that money so it's not great in that circumstance. I currently have like 50% allocation of my portfolio with DHHF, but I'm considering changing the allocation to more 25% each or something even more aggressive. My biggest problem is that the market just had an insane week being at ATH's, and as I said, I see this strategy as being even more viable during a downturn so I'm a bit scared. Even though I am young, I value diversifying and lower risk, so we'll see, but I think I might re-allocate when the next downturn hits, or maybe I won't cause I don't want to pay the taxes and DHHF is doing fine for me anyways.
But anyways, I'd like to get everyone's take on this cause I think levered funds get a bad wrap for no apparent reason. Like from my perspective it is the beginner killer due to what I discussed with loss-aversion, but if you have a better fundamental understanding of the market and a longer-time horizon I personally don't see anything wrong with it. Maybe I'm missing something, I don't know, cause everywhere I look they are talking live levered funds are the plague.