Risk is in vogue with ETF investors again. Signs of speculative fervor are increasingly clear in the S&P 500. But are investors willing to jump into the very riskiest ETFs?
Apparently not yet. Investors have their limits when it comes to taking long shots on ETFs, it seems. Shares of 60% of the 10 riskiest actively traded ETFs are down this year, says an Investor's Business Daily analysis of data from Morningstar Direct. Risk is measured by the ETFs' five-year beta, a measurement of volatility vs. the market.
Most of the riskiest ETFs magnified their bets using debt. But their track record for investors is mixed this year.
"Some investors have turned to leveraged ETFs in an effort to boost returns and embrace higher volatility," said Todd Rosenbluth, head of research at TMX VettaFi. "However, such risks are not always rewarded either as the underlying investment style is out of favor or because of slippage."
The Riskiest ETF Is A Treasury Fund?
When most investors think of risky ETFs, funds like ARK Innovation come to mind. And for good reason. The ETF's beta shows the fund is roughly twice as risky as the S&P 500.
ARK's flagship fund is loaded with volatile stocks like Tesla and Coinbase Global. And the ETF is performing well this year, up 35% on a total-return basis. But it's nowhere near as risky as some other ETFs.
Surprisingly, an ETF that owns U.S. long-term debt using leverage is the riskiest actively traded fund. Direxion Daily 20+ Year Treasury Bull 3x sports a beta showing it's 6.6 times riskier than the market. And investors aren't being rewarded for taking on all that added risk. The ETF has a -8% return this year.
The ETF's leverage magnifies the bond market's volatility, which is already ramped up due to politics. "While bonds in general tend to incur low market movements, long-term Treasuries are (volatile)," Rosenbluth said. ''If investors believe the Fed is going to aggressively cut interest rates, long-term Treasuries would be a beneficiary. The Fed has not done so, taking a more patient approach with monetary policy."
Drawbacks Of Leverage Vs. S&P 500
The negatives of using debt for ETFs are just as apparent with stock funds. Consider ProShares UltraPro Russell 2000. The ETF uses leverage to amp up returns of the Russell 2000 index of small-cap stocks.
But despite being three times more risky than the index, the ProShares ETF's return this year is -11%. That's in a year where the Russell 2000 index itself is flat, Rosenbluth points out. That slippage isn't what investors are looking for when they shoulder extra risk.
Risk Isn't Going Anywhere With S&P 500
Despite the risks of leveraged ETFs, confident ETF investors still like them at market turns. Such funds can ramp up returns when markets rise.
ProShares UltraPro QQQ is nearly four times riskier than the market due to leverage. But its return this year of 14.1% is adding multiple percentage points to the 11.4% return of the nonleveraged Invesco QQQ Trust. And that's worthwhile for some investors.
"Investors feel confident using leveraged ETFs because they have confidence that the stock market and parts of it will continue to climb higher," Rosenbluth said. "Though concerns about the impact of tariffs persist, many people believe the impact on the economy and leading companies will be contained. If this narrative shifts, investors in leveraged ETFs could be punished."
The Riskiest Actively Traded ETFs
Based on five-year beta
| Name | Ticker | Average daily volume over 3 months, in millions |
Five-year beta |
|---|---|---|---|
| Direxion Daily 20+ Yr Treasury Bull 3X | TMF | 9.1 | 6.61 |
| ProShares Ultra Bloomberg Natural Gas | BOIL | 3.4 | 5.33 |
| Direxion Daily Semiconductor Bull 3X | SOXL | 133.9 | 4.40 |
| Direxion Daily Homebuilders & Suppliers Bull 3X | NAIL | 0.8 | 3.94 |
| Direxion Daily Technology Bull 3X | TECL | 1.4 | 3.71 |
| ProShares UltraPro QQQ | TQQQ | 72.1 | 3.55 |
| Direxion Daily Small Cap Bull 3X | TNA | 13.9 | 3.36 |
| ProShares UltraPro Russell2000 | URTY | 1.2 | 3.36 |
| ProShares Ultra Semiconductors | USD | 0.6 | 3.12 |
| Direxion Daily S&P500 Bull 3X | SPXL | 4.0 | 3.05 |
