This AI ETF's Price Nearly Doubled in a Few Weeks. Now Wall Street Wants to Add Leverage.

One of the most successful exchange-traded fund (ETF) launches in recent memory came just within the past couple of months. The Roundhill Memory ETF (NYSEMKT: DRAM) has returned roughly 90% since its inception on April 2 and has blown up to more than $10 billion in assets.

Its secret? It targeted a very narrow segment of the artificial intelligence (AI) -- memory and storage -- that will be in high demand as all phases of the build-out advance in the coming years.

As is usually the case in the ETF industry, others are trying to capture the wave. Filings for similar ETFs have already been made, including one that, not surprisingly, tries to leverage the idea. The proposed Leverage Shares 2X Long Memory Daily ETF would double the daily performance of DRAM, net of fees and expenses.

Leverage is all the rage nowadays. But it could be especially dangerous with this market niche.

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What the DRAM ETF actually is

The Roundhill Memory ETF offers more pure-play memory exposure than you might get with the traditional semiconductor ETFs. By focusing narrowly on just the memory and storage theme, you get access to a very specific story.

But there are only a few big memory players, and the fund's composition reflects that. The top three holdings -- SK Hynix, Micron Technology (NASDAQ: MU), and Samsung -- account for a combined 74% of the portfolio. This is a very concentrated fund that is essentially a conviction pick on just three companies.

Why a 2x version becomes especially dangerous

As with any leveraged product, they're designed to be short-term trading vehicles, not long-term investments. A number of issues prevent them from simply doubling your returns in the long term. And that's separate from the hugely volatile swings they can expect almost daily.

There's volatility decay, which is the gradual erosion of value that occurs with leveraged ETFs due to the mathematical effects of daily compounding. Since the funds reset their exposure every day, long-term returns don't necessarily correspond to simply multiplying the underlying security's performance by 2. The more volatile the security is, the more volatility decay the fund is likely to experience.

There are also high trading costs. Many leveraged ETFs charge expense ratios of 0.75% to 1%. That's on top of the cost that comes from needing to reset leverage every trading day. Those costs eat away at returns over time.

Leveraged ETFs are typically very volatile for virtually any security they're based on. They are especially so for highly concentrated tech portfolios tied into the AI trade.

The Roundhill Memory ETF is a reasonable investment for investors who want to allocate a small portion of their portfolio to a high-potential theme. Leveraged versions can become excessively risky very quickly. That's not something many retail investors are prepared for.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.