IBKR Podcasts What’s the Catch with Leveraged ETFs?
Nov 17, 2025
Ed Eglinski, Managing Director at Direction Funds, dives into the world of leveraged and inverse ETFs, uncovering their mechanics and risks. He explains why these funds are designed for daily performance and the critical role of timing. The conversation highlights tactical uses like hedging and short-term trades while addressing common investor misconceptions about buy-and-hold strategies. Ed also shares insights on recent flow trends and emphasizes the importance of understanding risks and active monitoring for potential investors.
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Designed For Short-Term Active Trading
- Leverage and inverse ETFs are designed for short-term active trading and show high daily turnover and volume.
- Direction's funds display leverage factors (up to 3x) or inverse -1x and include the leverage point and the word "daily" in their names.
Daily Compounding Changes Outcomes
- These ETFs target a multiple of daily returns, so holding beyond one day introduces compounding effects that can magnify gains or losses.
- Choppy markets can erode value even when the underlying index returns to its start level due to daily compounding.
Use Them For Short Tactical Trades
- Use leveraged and inverse ETFs for headline-driven, short-term trades like earnings, Fed meetings, or geopolitical events.
- Monitor positions daily and rebalance periodically when using them for hedges to maintain desired exposure.