Making Sense of Leveraged ETFs: Are They the Right Choice for Long-Term Investors?

Leveraged exchange-traded funds (ETFs), such as ProShares UltraPro QQQ (TQQQ) and ProShares Ultra S&P 500 (SSO) are tempting investment options, but are they the right choice for long-term buy-and-hold investors? Here's what retail investors need to know about these popular leveraged ETFs.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

TQQQ charges a marginally lower expense ratio than SSO, making it a bit more affordable for cost-conscious traders. TQQQ also offers a slightly higher dividend yield, which could appeal to those seeking a small income boost alongside leveraged growth.

Performance & Risk Comparison

What's Inside

TQQQ tracks triple the daily returns of the Nasdaq-100 and is heavily tilted toward technology (54%), with additional weight in communication services (17%) and consumer cyclical stocks (13%). The fund holds 123 positions, with top weights in Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT), and has operated for nearly 16 years. The daily leverage reset is a critical quirk, meaning returns can diverge from long-term index moves, especially in volatile markets.

SSO, in contrast, delivers 2x daily S&P 500 exposure, resulting in a broader sector mix—technology (31%), a large allocation to cash and others (30%), and financial services (9%). Its top holdings are Nvidia, Apple, and Microsoft, but with lower individual weights. Both funds use daily leverage resets, a structure that can magnify losses as well as gains over time.

For more guidance on ETF investing, check out the full guide at this link.

Foolish Take

While the prospect of doubling or tripling the returns of a benchmark index like the S&P 500 is tantalizing, investors should understand the finer points of leveraged ETFs before they take the plunge. Here are some key takeaways for average investors.

First off, investors need to remember that leverage cuts both ways. That means in addition to big returns there are hefty drawdowns. The TQQQ, for example, experienced a drawdown of 82% back in 2022. Such a drawdown represents extreme volatility, and everyone should be aware that such moves are possible for funds that employ 2x or 3x leverage.

Next, there's another side effect of big leverage -- daily leverage resets and time decay. In short, this process means that over the long term, these leveraged ETFs don't deliver 2x or 3x returns. What's more, the funds themselves acknowledge this.

In short, these funds are designed to deliver 2x or 3x returns on a daily basis -- not monthly or yearly. That's why the TQQQ has delivered a five-year compound annual growth rate (CAGR) of 22.9% versus a CAGR of 16.1% for the QQQ. If the fund were delivering 3x returns over the long term, its CAGR should be closer to 48%, rather than 16%.

Lastly, both funds charge higher-than-average fees through expense ratios that are above 0.80%. While that's not the highest expense ratio around, it's not cheap either.

To sum up, leveraged ETFs are designed to deliver amplified short-term (daily) returns versus their respective benchmarks. As such, they fail to measure up over longer time horizons. What's more, their reliance on leverage means they experience extreme drawdowns in corrections and bear markets, which can cause many investors to bail out at the worst possible time. Finally, they both charge higher-than-average expense ratios. In other words, be forewarned: These leveraged ETFs are not for the faint-of-heart or for buy-and-hold investors.

Glossary

Leveraged ETF: An exchange-traded fund designed to amplify daily returns of an underlying index, often using financial derivatives.
Expense ratio: The annual fee, as a percentage of assets, that a fund charges to cover operating costs.
Dividend yield: The annual dividends paid by a fund, expressed as a percentage of its current price.
Beta: A measure of a fund's volatility compared to the overall market, typically the S&P 500.
Max drawdown: The largest observed percentage drop from a fund’s peak value to its lowest point over a specified period.
Daily leverage reset: The process by which leveraged ETFs adjust their exposure each day to maintain a set multiple of index returns.
Nasdaq-100: An index of 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
S&P 500: A stock market index tracking 500 large U.S. companies, widely used as a market benchmark.
AUM (Assets Under Management): The total market value of assets that a fund manages on behalf of investors.
Sector allocation: The distribution of a fund’s investments across different industry sectors.
Volatility: The degree of variation in a fund’s price over time, indicating risk or uncertainty.
Growth of $1,000: The increase in value of a $1,000 investment over a specified period, assuming all returns are reinvested.

Jake Lerch has positions in Nvidia. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.