Why 3x ETFs Are Riskier Than You Might Think

Triple-Leveraged Funds Promise Big Returns But Pack Hidden Dangers

Reviewed by Andy Smith

Suppose you’re sure you can make a trade now that would net you a 5% gain. That would be great, but what if you could instead net a 15% profit? That’s the appeal of triple-leveraged (3x) exchange-traded funds (ETFs), investments that aim to triple the returns of the markets they track. But this magnification of gains has a flip side that some investors don’t fully grasp until it’s too late.

For experienced day traders, 3x ETFs can be worthwhile and beneficial tools. However, these products hide mathematical quirks that make them ticking time bombs for long-term investors. Even a choppy but flat market can steadily erode significant value through compounding—meaning you could lose money even when the market ends up exactly where it started. Below, we examine the advantages and disadvantages of trading in these funds.

Key Takeaways

Triple-leveraged (3x) exchange-traded funds (ETFs) come with substantial risk and aren’t appropriate for long-term investing.
Compounding can cause large losses for 3x ETFs during volatile markets, such as occurred with several such funds in the volatile markets of the 2020s.
Since they maintain a fixed level of leverage, 3x ETFs eventually face complete collapse if the underlying index declines more than 33% on a single day.
Because their high leverage creates a risk of enormous single-day losses, it’s not recommended to hold leveraged ETFs overnight.

When 3X ETFs: Recent Cautionary Tales

As with other leveraged ETFs, 3x ETFs track a wide variety of asset classes, such as stocks, bonds, and commodity futures. The difference is that 3x ETFs apply even greater leverage to gain three times the daily or monthly return of their respective underlying indexes. The idea behind 3x ETFs is to take advantage of quick market moves. They are not meant to—and shouldn’t—be held for the long term and aren’t recommended to be held even overnight.

Numerous market events in the 2020s provided stark examples of how quickly these investments can go very, very wrong. While quick-footed day traders might navigate these waters with less trouble, anyone else was likely given expensive lessons in the potential hazards for your portfolio.

For example, in late August 2024, the Direxion Daily Semiconductor Bull 3x Shares (SOXL) plunged 22.5% in a single day as tech stocks stumbled—its worst performance since March 2020, the start of the pandemic. That was after the fund had dropped more than 60% from July into August 2024. The 22.5% plunge took place after a mid-month rebound, demonstrating the extreme volatility of SOXL.

Here are just some of the other critical moments faced by triple-leveraged fund investors in the 2020s:

March 2020 (COVID Crash)

ProShares UltraPro QQQ (TQQQ) plunged 70% in weeks.
Many other triple-leveraged ETFs lost over half their value.
Some investors mistakenly bought the dip, not understanding daily resets, which we’ll discuss below.

April 2020 (Oil Price Collapse)

Leveraged oil ETFs were ravaged when oil futures briefly went negative.
Several funds were forced to restructure or liquidate.
Small investors were caught off guard by complex oil futures mechanics.

January-February 2022

TQQQ dropped more than 40% as the U.S. Federal Reserve signaled rate hikes.
Tech-focused leveraged funds were hit especially hard.
While funds like the Invesco QQQ Trust ETF (QQQ) were hit hard, investors in the 3X TQQQ were devastated.
Rising rates exposed risks of growth stock leverage.

March 2022 (Nickel Market Crisis)

WisdomTree’s 3x Short Nickel ETF collapsed to zero.
Nickel prices soared 250% in days during what ended up being a short squeeze.
The fund was forced to redeem all shares, wiping out investors.

September-October 2022

TQQQ fell 30% amid inflation fears.
Semiconductor leveraged funds like SOXL also suffered steep declines.
This showed the dangers of concentrating in a given sector while also using leveraged funds simultaneously.

August-September 2024

SOXL plunged 22.5% in one day.
Tech sector leveraged funds were hit especially hard in a broad sell-off.
Many new investors learned painful lessons about using these funds for anything other than day trading or other extremely short-term trading, especially during market volatility.

Note

Leveraged ETFs are intended for very short holding periods, typically less than a trading day. Over time, their value will tend to decay even if the underlying price moves favorably.

Key Lessons From Recent Major ETF Losses

Never hold these funds overnight unless you’re prepared for potential major losses.
Market volatility can trigger catastrophic declines even when the underlying index only drops moderately.
Even good news can hurt—a choppy rise in prices can erode value through daily resets.
The more volatile the sector (like tech or commodities), the riskier the leveraged ETF.

To understand how these disasters can unfold so quickly, let’s examine four key risk factors: how daily compounding works against you, how these funds amplify the volatility of markets, the complex derivatives these funds use, and the “constant leverage trap” that makes recovery from losses nearly impossible.

Derivatives: The Engine Behind the Leverage

Triple-leveraged ETFs don’t simply borrow money to amplify returns. Instead, they use complex financial contracts called derivatives to create their leverage, typically a mix of futures contracts, swaps, and options.

Each of these has specific risks:

Futures contracts can move differently than the actual market they track.
Swaps depend on other financial firms keeping their promises to pay.
Options can expire worthless if market timing is off.

If any of these building blocks fails, the ETF can crumble. Here are the risks you’re indirectly signing onto:

Market risk: The chance that the derivatives’ value moves differently than expected. For example, a futures contract tracking the S&P 500 might fall more sharply than the index itself during market stress.
Counterparty risk: The chance that the other party in a derivative contract can’t or won’t pay up. If a bank providing swap contracts to a leveraged ETF fails, the fund could face severe losses.
Liquidity risk: The possibility that an ETF can’t easily buy or sell its derivative positions at all or without moving market prices. During market turmoil, derivatives can become much harder to trade, forcing funds to accept unfavorable prices.
Interconnection risk: How problems in one part of the financial markets can spread to others. When derivatives markets seize up, it can create a domino effect hitting multiple funds and market sectors simultaneously.

This complex web of risks means that even if the market index a fund tracks moves as expected, the fund itself could perform very differently because of trouble with its derivative positions.

Volatility: Triple the Gains and Triple the Losses

For most investments, volatility makes for sometimes nausea-inducing ups and downs. But for triple-leveraged ETFs, volatility can be lethal. Even small market swings get amplified into dramatic price moves that can quickly snowball into major losses.

Consider the difference between the Nasdaq-100 tracking fund QQQ and its triple-leveraged cousin TQQQ, whose price chart is above. When tech stocks hit turbulence in March 2020, QQQ dropped about 28%—a significant but manageable decline. TQQQ, however, plummeted 70% during the same period. That’s ends up far worse than simply triple the loss, thanks to the fund’s daily reset mechanism magnifying each day’s volatile moves.

Even in calmer markets, TQQQ regularly sees daily price swings of 5% or more, while QQQ might move just 1% to 2%. This extreme volatility makes these funds especially dangerous for overnight holding— a post-market news announcement that might knock QQQ down 3% could send TQQQ plunging 9% or worse before you can even place a trade.

The Daily Reset Trap

In addition to simple volatility, investors in triple-leveraged ETFs need to beware the daily reset trap. These funds must reset their leverage every day because they must maintain exactly 300% exposure to their target index at all times.

So each day at market close, the fund adjusts its holdings to get back to that 300% target. Let’s look at an example.

First, an Up Day

An index that starts at 100.
A 3x leveraged ETF that starts with $100, designed to move three times the index.
The index borrows money to maintain exposure to $300 worth of assets (3x the index)
On day one, the index rises from 100 to 110 (+10%)
On day one, the 3x ETF gains 30%, with a new value of $130.
Under the daily reset, the ETF must now control $390 worth of assets (3 x $130), because it must maintain three times the fund’s total assets in exposure to the index. So it buys another $90 of exposure.

Then, a Down Day

So far so good, because the index went up on day one. But let’s look at what happens when the market goes down the next day.

The index falls 10% (the same percentage as the previous day’s rise), from 110 to 99.
The 3x ETF should lose 30%, so its value drops from $130 to $91.
So since the start of trading on day one, the index has gone up 10% then down 10%, yet lost 1% of its overall value.
Meanwhile, the 3x ETF has gone up 30% and down 30%—but lost 9% of its original value.

This illustrates the peril of the daily reset and holding such a highly leveraged instrument for multiple days, especially in a choppy market.

Compounding

This brings us to compounding, which also heightens the risk for investors (as well as the potential reward). With compounding, gains and losses stack up quickly even over very short periods, particularly in choppy markets.

With compounding, the daily reset trap can become even more painful if you continue to hold. Extending our example above, consider what would happen if the index again rose 10% on the third day and fell 10% on the fourth. The index would end up at 98.01, a loss of 1.99%, but the 3XETF’s value would be $82.81, a loss of 17.19%—all while going up and down by the same percentage.

Important

Even in flat but volatile markets, these funds can lose money because of a mathematical effect called compounding.

High Expense Ratios

Beyond the inherent risks of these investments, triple-leveraged ETFs also have very high expense ratios, which make them unattractive for long-term investors. All mutual funds and exchange-traded funds charge their shareholders an expense ratio to cover the fund’s total annual operating expenses.

The expense ratio is expressed as a percentage of a fund’s average net assets, and it can include various operational costs. The expense ratio, which is calculated annually and disclosed in the fund’s prospectus and shareholder reports, directly reduces the fund’s returns to its shareholders.

Even a small difference in expense ratios can cost investors a substantial amount of money in the long run. Triple-leveraged ETFs often charge around 1% per year. For example, TQQQ, which seeks to triple the daily returns of the Nasdaq 100, has an expense ratio of 0.84%.

Compare that with typical stock market index ETFs, which usually have low expense ratios. For example, the Invesco QQQ, which is not leveraged and tracks the same index as the TQQQ, the Nasdaq 100, has an expense ratio of 0.20%.

What Does It Mean When an ETF Is Leveraged 3x?

An ETF that is leveraged 3x seeks to return three times the return of the index or other benchmark that it tracks. A 3x S&P 500 index ETF, for instance, would return +3% if the S&P rose by 1%. It would also lose 3% if the S&P dropped by 1%.

What Research Is Needed to Trade in Triple-Leveraged ETFs?

Leveraged ETFs require considerations such as how they are constructed and how often their portfolio is rolled over and rebalanced. For instance, some may use option contracts while others use structured notes. Leveraged ETFs also tend to have relatively high expense ratios, which also has to be considered.

What Happens If Triple-Leveraged ETFs Go to Zero?

Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero. Before this happens, leveraged ETFs can undertake a reverse stock split, creating higher-priced shares but reducing the number of ETF units outstanding. Ultimately, if the fund’s share prices drop low enough and there is no demand for a reverse split, the ETF may be delisted.

The Bottom Line

Triple-leveraged ETFs might seem attractive with their promise of tripling market returns, but they can be ticking time bombs for investors who aren’t careful. These complex products are designed for sophisticated day traders, not buy-and-hold investors. Even when markets are relatively flat, these funds can lose substantial value through daily resets and compounding.

Add in high fees, complex derivatives, and the potential for complete collapse if markets drop sharply, and it’s clear why financial experts warn that 3x ETFs should be approached with extreme caution—if at all. For most investors seeking market exposure, traditional non-leveraged ETFs offer a much safer path to achieving their investment goals.