Compound Annual Growth Rates for Leveraged Versus Unleveraged Exchange Traded Funds

Exchanged Traded Funds (ETFs) offer self-directed investors an easy-to-use tool for growing their net worth.  You can think of an ETF as a basket of securities that can be bought and sold just like the stock shares for an individual company.  If the basket of securities for an ETF goes up over time, then shares for the ETF shares can also rise.  Of course, ETF share prices can also decline over time when their underlying basket of securities fail to rise or even just do not grow from their purchase price.  The objective for self-directed investors who want to grow their net worth with ETFs is to invest and hold shares in ETFs whose prices are increasing instead of declining most of the time.

Leveraged ETFs are designed for investors who seek to have their invested net worth grow faster than an underlying basket of securities.  The greater the leverage for an ETF, the greater potential for accelerated net worth accumulation.  Because of the ways leveraged ETFs manage assets, they can also result in greater losses than the underlying securities for an unleveraged  ETF.

In a prior post (Can Leveraged ETFs Safely Grow Long-Term Investments?), this blog offers some introductory coverage of leveraged versus unleveraged ETFs.  The prior post found that returns from leveraged ETFs surpassed those from unleveraged ETFs.  The focus of the earlier post was restricted to major market indexes (namely, the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq-100 Index).  The current post aims to help self-directed investors better understand the advantages and disadvantages of leveraged ETFs by comparing ETF growth rates from three asset categories.

Three Different Asset Categories Examined in this Post

The three asset categories examined in this post are based on

• major market indexes,
• more narrowly focused indexes than the major market indexes, and
• single stocks.

Leveraged and unleveraged ETFs within each asset category are compared by either their compound annual growth rate (cagr) or the total growth rate since the most recent inception date between corresponding leveraged versus unleveraged ETFs.

• The cagr returns the annual rate of change from a beginning value through and ending value.  It is generally used to assess the average annual change rates over five or more years.  Examples of how to compute the compound annual growth rate can be found in How to Compare Close Prices for Three Securities Over Four Years.
• When comparing financial security price changes over durations that may not have enough years to assess representative compound annual growth rates, you can compute the overall growth rate from a beginning security price through an ending security price.  When comparing overall growth rate between two or more security prices, it is helpful to use the same duration for both securities.

This post tracks the assets within each major market index with two ETFs.  The following screenshot shows the unleveraged and leveraged ticker names and security names for each member for each pair of major market ETFs.

The next screen image shows four pairs of ETF securities that are more narrowly focused versus one another than the ETFs for major market indexes.  Because of the recent prominence of semiconductor securities two of the four pairs for matching unleveraged versus leveraged ETFs are from the semiconductor industry.  The leveraged tickers are SOXL and USD.  Their corresponding unleveraged tickers are, respectively, SOXX and SMH.  The remaining two pairs are, respectively, for energy sector securities (XLE and ERX) and junior (smaller) gold miner securities (GDXJ and JNUG).

The final screenshot in this section lists the ticker and security names for single-stock ETFs and their matching underlying single stocks.  The pairs in the following table are comprised of two different types of entities.  The rows in columns A and B are for single stocks.  The rows in columns C and D are for leveraged ETFs based on the single stocks in columns A and B.

• Column A denotes the tickers for six widely known single stocks: AAPL, AMZN, META, GOOGL, MSFT, and NVDA.
• Column B lists the security names for the six tickers in Column A.
• Column C displays tickers for single-stock ETFs that correspond to the six stock tickers in Column A.
• Column D itemizes the security names for the tickers in Column C. 

Leveraged single-stock ETFs are particularly appealing when you have an exceptionally strong level of conviction about the likely growth rate for the underlying stock prices.

Comparisons for Major Market ETFs

As indicated above, this post performs comparisons for three pairs of major market ETFs.  Within each pair, the ending adjusted close value (Adj Close) is compared to the beginning adjusted close value.  The observations within each pair are for the unleveraged ETF and the corresponding leveraged ETF.

The following two screen shots show the first and the last three rows of data for the DIA ticker.  Recall that the DIA ticker denotes the SPDR Dow Jones Industrial Average ETF Trust, which is for the unleveraged Dow Jones Industrial Average.  The beginning Adj Close value for the DIA ticker is 44.873058 on 1/20/1998.  The ending ADJ Close value for the DIA ticker is 400.320007 on 7/12/2024.

• The inception date for the DIA ticker is 1/20/1998.
• The last trading date for which price values were collected for this post is 7/12/2024.

The next two screenshots show the first and the last three rows of data for the UDOW ticker.  Recall that the UDOW ticker denotes the ProShares UltraPro Dow30 ETF, which is for the leveraged ETF version of the Dow Jones Industrial Average.

The final screenshot of this section appears next.  The screenshot devotes a row to the inputs and the cagr values for each of the six major market ETF ticker symbols -- one for each of the three unleveraged ETFs and a second three for each of the leveraged ETFs.  The cagr is computed from a ticker’s inception date through the last date for which data was collected for this post.

• The tickers for the ETFs appear in rows 3 through 8 of column A.
•  The inception date for each ETF appears in column B.  This is the beginning trading date for each ETF.  Notice that each ticker has a different inception date.  This is because each of the six ETFs was initially offered for public sale on a different date.
• The last date through which data was collected (7/12/2024) is the same for all six tickers in this post.

The last column (H) in the following screenshot displays the cagr column values.  These values in rows 3, 5, 7 are for unleveraged ETFs.  In contrast, the cagr values in rows 4, 6, and 8 are for leveraged ETFs.  As you can see, the cagr values for leveraged ETFs are consistently larger than for unleveraged ETFs.

The financial literature does not normally indicate that leveraged ETFs are suitable for long term investments.  However, repeated empirical studies confirm that ETFs based on the TQQQ ticker outperform ETFs based on the QQQ (SQL Server Data Mining for Leveraged Versus Unleveraged ETFs as a Long-Term Investment and QQQ vs TQQQ, why would I not pick TQQQ?).  I have computed these kind of comparisons for ETFs based on major markets over different holding periods, and I regularly find that leveraged ETFs for major market indexes have larger returns.  Furthermore, the order of the returns is typically the same.  That is, the largest advantage is for TQQQ versus QQQ, followed by SPXL versus SPY,  followed by UDOW versus DIA.

Comparisons for Selected ETF Categories

While the preceding results are interesting, they are for a very restricted set of leveraged versus unleveraged ETFs.  This section examines four more pairs of leveraged versus unleveraged ETFs.

• Two pairs of ETFs are for the semiconductor industry.
• SOXX and SMH are two unleveraged ETFs.
• SOXL and USD are two leveraged ETFs.
• One pair is for energy industry securities.
• XLE is the ticker for an unleveraged ETF.
• ERX is the ticker for a leveraged ETF.
• The final pair in the set of four pairs of ETFs is for junior gold miners.
• GDXJ is the ticker for an unleveraged ETF.
• JNUG is the ticker for a leveraged ETF.

The next screenshot shows cagr values along with the inputs for the cagr values for each of the eight ETFs tracked in this section.  This screenshot displays its data in the same format as the final screenshot from the preceding section.  However, the cagr values for leveraged versus unleveraged ETFs are not consistently in favor of leveraged ETFs outperforming unleveraged ETFS.

• For two pair of ETFs (SOXX versus SOXL and SMH versus USD), the growth of the leveraged ETFs exceeded the growth of the unleveraged ETFs.
• For the ETFs for energy stocks as well as the junior gold miner stocks, the leveraged ETFs did not return larger cagr values than the unleveraged ETFs.

These results suggest the need for additional research to clarify when and why leverage works better for semiconductor stocks than either energy or junior gold miner stocks.

Comparisons for Single-stock ETFs

Single-stock ETFs are the third type of ETF examined in this post.  The underlying security for a single-stock ETF is the adjusted close price for the single stock instead of the adjusted close price for a basket of underlying securities.  Ignoring tracking error, an ETF with a leverage factor of two should have twice the returns on a daily basis as the returns from its underlying security.  All the single-stock ETFs examined in this post have a leverage factor of two, but you can also buy single-stock ETFs with other leverage factors.

Another feature that makes a single-stock ETF different from a traditional ETF is that single-stock ETFs have typically been introduced in just the last couple of years or so.  Therefore, the appropriate comparison metric of a leveraged single-stock ETF is not a pair of cagr values.  Instead, you should compare the total change percent from the single-stock leveraged ETF to the total underlying adjusted close price for its adjusted single stock price.  The comparison should have a common beginning date and a common ending date.

The following screenshot presents the inputs for the underlying single stocks along with their matching single-stock ETFs.

• The ticker symbols for the single stocks appear in alphabetical order as: AAPL, AMZN, META, GOOGL, MSFT, and NVDA.
• The corresponding ticker symbols for the single-stock ETFs appear in alphabetical order as: AAPX, AMZU, FBL, GGLL, MSFU, and NVDU.
• The security names matching the preceding twelve tickers appear in the third screenshot within the “Three Different Asset Categories Examined in this Post” section of this post.

Notice that consecutive ticker pairs have matching beginning and ending trading dates.  The matching dates are essential for valid comparisons.

• For example, the AAPL and AAPX tickers in column A of rows three and four of the following screenshot has data for
• Beginning and ending trading days in columns B and C
• Number of trading days for a ticker in column D
• Beginning and ending adjusted close values in columns E and F
• Adjusted close percent change values from beginning trading date through ending trading date appear in column G
• Each of the subsequent ten rows contains data for a successive pair of single stock and single-stock ETF tickers.

The adjusted close percent change values in column G are particularly important because they denote the total percent change in adjusted close.   The major point of this section is to assess if leveraged single-stock ETFs have larger change percent values than their corresponding single-stock securities.

• If you are looking for a systematic pattern, the screenshot below contains good news.  This is because the adjusted close percent change is always larger for its single-stock leveraged ETF than its matching single-stock security.
• The size and ratio of the adjusted close percent change is different for each pair.
• The ticker with the largest adjusted close percent change is FBL, which denotes the GraniteShares 2x Long META Daily ETF.
• The ticker with the smallest adjusted close percent is AAPL, which denotes the stock for Apple Inc.
• As a result of these size and ratio differences, you should perform the same  comparisons for additional pairs of single-stock leveraged ETFs and their matching stocks before reaching any broad conclusions about the performance of single-stock leveraged ETFs and their corresponding single stocks.

Concluding Remarks

The purpose of this analysis is to illustrate the likelihood of leveraged ETFs generating larger returns than corresponding unleveraged ETFs.  Performance comparisons were made across three categories of assets

• major market indexes,
• mixed asset category classes, and
• relatively recently introduced single-stock ETFs.

The assets within each category were compared for unleveraged versus leveraged ETFs.  There were 13 assets compared in the post.  The leveraged ETFs provided greater returns for 11 of the 13 comparisons.

There was also a clear tendency for the effects of leverage to be more beneficial for returns for some pairs of asset classes more than others.  Among the major market indexes, the TQQQ ticker generated the largest returns.  This pattern was demonstrated in multiple prior analyses as well.

Investors may also derive value from investment type for other criteria besides the magnitude of returns.  For example, volatility of findings and consistency of findings across asset categories are two critical criteria.  Future investigations that may merit investigation also include comparing inverse ETFs versus positively leveraged ETFs.  Finally, empirical studies replicating the results of this post across different asset categories and/or different timeframes are important because they can establish the robustness and consistency of the relationship between performance returns across asset classes and investment strategies.