Should Long-Term Investors Steer Clear of Leveraged ETFs?

Who wouldn't want to consider themselves a "pro" at investing? So when you see an exchange-traded fund called UltraPro S&P 500 ETF (NYSEMKT: UPRO), you might think you've found the perfect tool to build wealth. Over the past year, it has beaten a boring old S&P 500 index fund like Vanguard S&P 500 ETF (NYSEMKT: VOO) by over 10 percentage points. Think twice before you buy UltraPro S&P 500 ETF; the leverage it employs may be more than you can handle.

What does UltraPro S&P 500 ETF do?

UltraPro S&P 500 ETF is what is known as a leveraged ETF. Its goal is to produce a return that is three times larger than the return of the S&P 500 index each day. So, if the S&P 500 rises 1%, UltraPro S&P 500 ETF aims to gain 3%. To achieve this, it uses fairly complex investment techniques, but the real story for investors boils down to the time period that is being targeted: one day.

Image source: Getty Images.

In fact, the ETF's webpage clearly warns, "For any holding period other than a day, your return may be higher or lower than the Daily Target. These differences may be significant." If you are a long-term investor, you need to tread very carefully with an investment that is focused on achieving a daily goal.

It's a basic math problem

First, remember that the S&P 500 index goes up and down over time. Second, you need to keep in mind that the three times performance goal cuts both ways. And third, you need to consider the basic math of returns.

If a stock is trading hands at $10 and falls to $5, the loss is 50%. To get back to $10, a 100% gain is required. This is the math that works against you during downturns when you have a leveraged ETF as a long-term holding. The chart below is telling.

UPRO data by YCharts

Vanguard S&P 500 ETF rose nearly 15% over the past year, but UltraPro S&P 500 ETF increased by only 26%, which is nowhere near three times the gain of the S&P. The reason is the massive share price decline in early 2025. That drop was way worse than the corresponding drop in Vanguard S&P 500 ETF, leaving UltraPro S&P 500 ETF with a huge hole to dig out of.

The risk-return profile of owning a leveraged ETF over the long term leans heavily toward risk. These ETFs admit that they aren't likely to live up to the multiples they target on a daily basis over the long term. And unless you are willing to endure painful drawdowns during bear markets, the long-term reward probably isn't worth it.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.