The Leveraged ETF Trap That Could Wreck Tech Stocks

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**Kevin Muir** (0:30)
If we get a situation where all of a sudden SpaceX goes down 50% in a day, you're actually going to be insolvent, like the ETF will be gone. I suspect sharks hunt for these things. These leveraged ETFs are in essence a negative gamma that are exaggerating moves all over the place.

**Maggie** (0:56)
I share some of your pieces, so I'm like, wait, this is really important. You're looking at little indicators everywhere that have you worried. So let's talk about another one. Leveraged ETFs.

**Kevin Muir** (1:08)
Oh man. Okay. So for those who don't know what leveraged ETFs are, they're ETFs that allow an investor to get two or three times the daily return. And I'm going to stress here, the daily return. It's really important that you understand that it's not the total return. It's the daily return of an underlying asset. And one of the problems that people encounter when they buy these things is they'll buy SpaceX ETF, the double SpaceX. And SpaceX will go, it'll move around for a little while. And then, you know, three months from now, it'll be up 10%. And they think because they own the SpaceX two times, that they're going to be up 20%.
And then they go look at it and they're like, holy smokes, my ETF is actually down. How could that be? Right? It's supposed to be twice the return. Remember how I said it's twice the daily return. And one of the things that you just need to be aware of is that because the ETF has to reset every day, it is forced to go and do hedging. And in essence, if you stopped and thought about, if you went and bought $100,000 of SpaceX and you put up $50,000 and you margined it two for one, and then SpaceX is doubled, okay, versus your equity, you would actually have less leverage.
You would have a situation where you actually have money in there. So you would be playing with the house's money. Conversely, if we had a situation where you borrowed that money and then SpaceX went down, your broker would be phoning you up to buy to get more money. And so one of the ways the way that the ETF gets around this is that they say, we're going to reset the leverage each and every day, so that is always two times. And so what that means is as SpaceX or whatever the stock is, is going up, they're buying more. And then as SpaceX is going down, they're selling more. It's in essence, negative gamma. So the first worry you have as an investor is just to understand that, you know, you could have a situation where SpaceX goes up and down a lot, and that hedging ends up costing you a lot of money. So your return doesn't end up being what you think it is. And people will say it's always there's a ripoff or whatever, and they don't understand that what it did was it actually provided two times the daily return, just like they said it would. So that's the first problem with it. The second problem with these things is that if we get a situation where all of a sudden SpaceX goes down 50% in a day, you're going to be with your two times daily return, you're actually going to be insolvent, like the ETF will be gone. So one of the things that they do is as it approaches that point where the ETF becomes insolvent, they actually wind it down. And we saw it this week with Lucid. Lucid had a two times ETF.
And Lucid is nobody really trades it anymore. There was a time when everyone loved EVs, but now no one's done it. It was a small ETF that had a few million dollars or something. It wasn't a big thing. But as it went down, there was a news report that caused the stock to fall 50%. And they immediately just said, okay, we have to wind down the ETF. Okay. Now the trouble is, Maggie, is that on the day Lucid rallied back up, it was only down 16% on that day. So you, as a two times ETF holder, got stopped out because Lucid ended up falling 50%.