Wall Street's levered-ETF boom is close to becoming a billion-dollar moneymaker

A popular ETF trade beloved by market speculators is fast turning into a billion-dollar revenue generator for nimble-footed financial firms.

Traders have been diving into leveraged exchange-traded funds, a subset of a derivatives-enhanced products, offering to amp up the daily moves of the world’s most popular stocks and indexes. That’s enriched the firms behind the majority of these ETFs. They netted around $940 million in revenue in 2024, according to Bloomberg Intelligence, which used napkin math to multiply their assets by their fees. That’s a record 37% jump, beating last year’s all-time high.

The six firms that dominate the arena are: Direxion, ProShares, Tidal Investments, GraniteShares, Tuttle Capital Management and AXS Investments.

Leveraged ETFs were in the spotlight on Monday when China’s answer to ChatGPT, DeepSeek, sparked a selloff in technology stocks. Stock market heavy-weight Nvidia Corp. saw nearly $600 billion of its market cap wiped out in a single day. As a result, momentum-chasing day traders who pounced on a trio of Nvidia-focused funds collectively saw about $2 billion in value shaved off during the trading session, BI-compiled data show, while the leveraged ETF complex erased around $10 billion as a whole.

It could have been a bitter lesson for day traders that embraced the category. Instead, traders plowed another $1 billion into the GraniteShares 2x Long NVDA Daily ETF (ticker NVDL) — its biggest one-day inflow on record — after eight straight days of outflows. That’s as the ETF tumbled a record 34% Monday.

The influx “speaks to investors willingness to react and buy the dip even on the most volatile of days,” said Will Rhind, the chief executive officer of GraniteShares.

Industry critics have long worried that many investors might not read the fine print and risk losing money in the process. Such products are often meant for active traders who want to bet on and against an asset’s performance for no more than a single day, as these funds typically veer off course when tracking shares over a longer period. 

Technical risks like volatility drag — when big valuation swings diminish returns — and the erosion of net-asset value are not talked about enough when it comes to promoting these products, according Jane Edmondson, head of index product strategy at TMX VettaFi. 

“A lot of retail investors do not understand the decay effect tied to daily rebalancing which causes return erosion over time,” she said. “This side-effect of leverage can cause quite a lot of dispersion relative to the underlying index.”

But issuers defend their popularity. As one of the more long-standing firms, Direxion noted it has a dedicated education section on its website, while Tuttle Capital head Matthew Tuttle said such offerings help clients “manage risks and generate returns.” 

The data suggest that the majority of the issuers derived 80% or more of their revenue from the complex ETFs, with Direxion as the most reliant. Calculations by BI show that the firm generated $396 million in ETF revenue last year, with a whopping 98.3% coming from its suite of leveraged and inverse ETFs.  

The high-octane offerings surged in popularity over the past few years, helped by the relentless bull market. The floodgates can be traced back to 2019 when US regulators eased constraints for launching new funds, followed by 2020 when they no longer considered some leveraged ETFs to be “complex.”

“There are dangers to any products you own. You just have to be aware of what you are holding,” said Mohit Bajaj, director of ETFs at WallachBeth Capital. But “the leverage ETF issuers have done a great job of fulfilling a demand in the marketplace.” 

The transition of leveraged ETFs from niche product to the mainstream is clearly a boon for issuers, according to BI analysts Eric Balchunas and Andre Yapp.

“Leveraged ETFs are arguably a good business to be in because there are products for both up and down markets and the big, low-cost issuers don’t compete in the category,” they said. It’s also a plus that “the products are agnostic to bull or bear market conditions.”

Whether or not these funds are good for risk-seeking investors remains up for debate. 

Matt Markiewicz of Tradr ETFs acknowledges there’s a learning curve with any new product, but “as investors’ palates become more sophisticated and they learn how and why these strategies could be useful, we expect appetite to rapidly grow.”