Anyone hoping to use leveraged inverse index funds as a way to maximize their returns may be sorely disappointed, writes Wenli Tan, a fund analyst for Morningstar. She says the funds, which essentially time the market, are too volatile to be worthwhile.
“Leveraged index funds seek to provide the return of an index and then some on a day-to-day basis,” Tan says. “But due to negative compounding, that doubling effect doesn’t hold true over the long haul, especially during choppy markets.”
High costs cut out some gains as well; some charge more than their actively managed counterparts, she writes, and can rack up a lot in transaction costs. Investors may also find the funds are too trendy to take advantage of.