The geopolitical and trade tensions that have ramped up in 2025 have fuelled investor interest in products that allow them to place bets on where they think markets — or pockets of the markets — are headed.
That includes leveraged and inverse-leveraged ETFs, which use different strategies including derivatives and debt to provide positive or negative multiples, respectively, of an underlying index or asset’s performance over a specified time. This can produce enhanced gains as well as losses.
As of Sept. 30, the funds have posted roughly $4.2 billion in net inflows, or about a third of their current total assets under management. In September, the funds gathered $907 million, breaking their monthly inflow record, according to National Bank Financial.
Industry players and observers say they expect the funds to continue to grow in assets and numbers. But they caution that the products are not suitable for all investors and that more education is needed on their risks.
“As retail participation in the ETF markets grows, levered and inverse ETFs will likely remain attractive to specific groups of investors,” said Tiffany Zhang, director of ETF research and strategy with National Bank in Toronto.
“However, compared to the ongoing migration to low-cost and broad-based products, these levered and inverse ETFs would likely represent a growing but small part of the ETF landscape.”
Light leverage, strong flows
The “strong” flows into this fund category are mostly finding their way into “lightly” leveraged ETFs that use cash borrowing at prime brokerages to lever up portfolios by 25% or 33%, as they seek to deliver 1.25 times or 1.33 times the performance of an underlying holding, Zhang said.
Some of these ETFs also employ call option writing to further enhance yields.
Evolve Funds Group Inc. is one firm that’s focused on ETFs with “modest” leverage.
It offers three funds that employ 25% leverage and an active covered call strategy on up to 33% of their portfolios. It also has two funds that solely employ 25% leverage to provide investors with 1.25 times the daily price movements of bitcoin and ether.
Unlike some asset managers that offer both leveraged and inverse-leveraged ETFs, Evolve only has the former in its product lineup. The firm’s philosophy has always leaned to the bullish side, said Raj Lala, Evolve’s president and CEO in Toronto.
Further, he said that ETFs with modest leverage tend to be held on a longer-term basis by investors than those with greater amounts of leverage that are commonly used for day trading.
“That hasn’t really been our focus area or target audience,” Lala said.
More leverage, more risk
That is, however, precisely the target audience of the leveraged and inverse-leveraged ETF lineup offered by LongPoint Asset Management Inc. and the BetaPro lineup offered by Global X Investments Canada Inc. Both use derivatives to provide investors with up to two or three times the positive or negative returns of an underlying asset or index. Global X also offers lightly leveraged ETFs outside of its BetaPro suite.
The firms brought triple-leveraged and inverse-leveraged ETFs to Canada earlier this year. Previously, Canadian investors had to look south of the border to gain access to these products.
ETFs of this nature, which apply 200% or 300% leverage, are designed “to meet the increasing demand for tactical short-term trading tools,” without requiring investors to open margin accounts and directly invest in derivatives, said Raghav Mehta, vice-president, ETF strategist with Global X in Toronto. This means sophisticated retail traders get access to similar tools typically used by experienced institutional investors.
“Unlike trading on margin or short selling, you don’t lose more than your principal amount invested,” Mehta explained.
Global X, which introduced leveraged and inverse-leveraged ETFs to Canada in 2008, has a long list of the products. Its ETFs offer daily exposure to various indices, like the Nasdaq 100 and TSX 60, and commodities, such as gold, oil and bitcoin (technically, a commodity).
Mehta said the products with 200% or 300% leverage have a short-term role to play in portfolios when there are spikes in market volatility, tariff-related announcements, central bank decisions, geopolitical events or earnings releases, each of which “create short-term windows or short-term trading opportunities for big and outsized market moves or potential profit opportunities in even a span of a few hours.”
LongPoint president and CEO Steve Hawkins agreed. His firm brought a slew of new leveraged and inverse-leveraged ETFs to market this year, allowing sophisticated investors to take daily positions based on their informed views across indices, stocks and commodities.
“The long-term view is to buy, hold, stay the course. But it’s not always easy for a lot of people to sit on their hands,” Hawkins said. “People are empowering themselves, taking charge of their investment portfolios and are using leveraged and inverse-leveraged ETF to execute on their thoughts, comments, ideas of what’s going to happen.”
But with more leverage comes more risk.
Depending on how well or poorly a fund’s underlying holding performs, that can either amplify an investor’s gains or losses.
Also, double and triple leveraged and inverse-leveraged ETFs reset their exposure daily, meaning they’re designed to deliver their stated multiple of an underlying holding’s return for one trading day only. Over longer holding periods, especially in volatile markets, compounding can cause returns to diverge significantly from what investors anticipate, Mehta said.
“These products are path dependent, subject to volatility drag and compounding risks,” he said. “So, because of the daily target rebalancing, we do not recommend holding these products longer than a trading day.”
Another factor to consider is that leveraged and inverse-leveraged ETFs can carry liquidity risk. The need for daily rebalancing and underlying derivatives may lead to widened bid-ask spreads and reduced trading efficiency.
This is different from lightly leveraged ETFs, which tend to use cash borrowing instead of derivatives and don’t necessarily have to rebalance daily, said Andres Rincon, managing director and head of ETF sales and strategy with TD Securities in Toronto.
Unlike their counterparts that apply greater leverage, Rincon noted that lightly leveraged funds are generally used by a broader group of investors, including advisors and retail investors who are seeking yield, “because they’re not as volatile.”
Some firms have sought to reduce these funds’ overall risk by hedging them to a given currency to mitigate currency risk.
Other considerations include high fund expense ratios for leveraged ETFs in the form of trading expense ratios and potential difficulty sustaining high distributions, depending on the strategy or provider, Zhang noted. The portfolio manager’s skills in terms of managing volatility, as well as the leverage and option writing program, if applicable, are also key to performance.
Investor education
Industry participants expect to see leveraged and inverse-leveraged ETFs continue to grow in number and popularity.
“Judging by the growth, I mean, I think it’s just going to continue,” Lala said.
At the same time, they say there’s a need for more education about how these funds work and the risks they pose.
This is especially important for double and triple leveraged and inverse-leveraged ETFs because “a lot of investors don’t fully understand what beta decay means and could get trapped into a situation where they’re just assuming that the leverage is linear and there’s no daily reset,” Lala said.
Global X, for one, has been releasing educational content alongside launches, Mehta said, adding, that the firm wants to “impart the right knowledge to the user, especially as more innovative products get introduced.”
Rincon supports the efforts of providers and regulators in boosting investor education, saying “there should be a lot of safeguards when you trade these, because once again, these products shouldn’t be held for the long term, and often they are in real life.”
“Everybody should understand what’s under the hood of their ETF and understand what … leverage means,” he added.
This article appears in the November 2025 issue of Investment Executive. Read the digital edition or read the articles online.
This story has been edited.