Leveraged ETFs: Riding the crypto rollercoaster while ‘lending’ a helping hand
18 February 2025
The rise of leveraged ETFs in the cryptocurrency market reflects a growing appetite for high-risk, high-reward investment strategies, says Matthew Chessum, director of securities finance at S&P Global Market Intelligence
Image: Shutterstock
In 2024, the exchange traded fund (ETF) market experienced remarkable growth, characterised by record inflows and a surge in diverse investment strategies. According to data from S&P Global Market Intelligence, US-listed ETFs saw an unprecedented US$1.12 trillion in inflows, nearly doubling the previous record. Equity ETFs dominated this landscape, attracting US$775 billion, with US$667 billion specifically directed towards US equity.
Fixed income ETFs also performed strongly, garnering US$301 billion in inflows. Additionally, active management strategies gained traction, particularly in fixed income, capturing 36 per cent of total flows. Thematic ETFs focusing on technology and clean energy continued to draw significant interest, while over 650 new ETFs were launched, breaking previous records. Among these trends, one of the most notable was the growth in popularity of leveraged ETFs, which have become increasingly appealing as volatility in cryptocurrencies has surged.
In recent years, the cryptocurrency market has experienced extreme volatility, leading to a surge in the popularity of leveraged ETFs. These financial instruments aim to provide amplified returns — often two or three times greater — of an underlying cryptocurrency or asset's performance. As investors seek to capitalise on the rapid price movements of cryptocurrencies, leveraged ETFs have emerged as a compelling option. However, the mechanisms behind these products involve complexities, particularly in the realm of securities lending, which plays a crucial role in their operation.
Top 5 revenue-generating leveraged equity ETFs January 2025
Leveraged cryptocurrency ETFs utilise derivatives, such as futures contracts, to achieve their desired leverage. This strategy allows them to magnify their gains (and losses) based on the performance of the underlying assets. However, the use of derivatives and the pursuit of leverage often lead to increased funding needs, which can strain the resources of ETF providers. To mitigate these costs, many providers participate in securities lending programmes, a practice that has become increasingly important in the context of all ETFs, not just those with leverage.
Íø±¬³Ô¹Ï lending involves ETF providers lending out securities — such as crypto-related stocks or the underlying assets of their ETFs — to generate additional income. This income serves as a vital source of revenue, helping to offset management fees and the costs associated with maintaining leveraged positions. Borrowers, including short sellers and market makers, pay a fee to access these lent securities, creating a mutually beneficial arrangement.
The growing popularity of leveraged ETFs has significantly impacted the demand for the underlying securities. As more investors flock to these products, the demand for the assets they track increases, thereby boosting the borrowing market for those securities. Borrowers may utilise the lent securities to hedge their leveraged ETF positions or execute arbitrage strategies, further fuelling market activity.
Market volatility, particularly in the cryptocurrency sector, tends to amplify the effects of leveraged ETFs. These funds often experience daily rebalancing to maintain their leverage ratios, which can lead to heightened volatility in the underlying securities. This volatility, in turn, increases the demand for stock lending, as traders seek to short overvalued or mispriced securities or hedge against movements related to leveraged ETFs. The dynamic nature of the crypto market creates a fertile ground for trading strategies that leverage these products.
The daily rebalancing of leveraged ETFs not only influences their performance but also impacts the broader market. As these funds frequently buy and sell securities to maintain their leverage, they contribute to market liquidity, creating additional lending opportunities for the underlying assets. This interaction between leveraged ETFs and the securities lending market is a key aspect of their operation, as it helps to facilitate smoother trading conditions.
For ETF providers, the income generated from securities lending is a crucial revenue stream, particularly in the highly volatile cryptocurrency market. This revenue helps to offset the costs associated with derivative positions and the leverage employed by the ETFs. As the demand for leveraged ETFs continues to grow, the significance of securities lending as a financial strategy will likely increase.
In conclusion, the rise of leveraged ETFs in the cryptocurrency market reflects a growing appetite for high-risk, high-reward investment strategies. As volatility increases, the role of securities lending becomes ever more critical in supporting these products and enhancing market liquidity. Understanding the interplay between leveraged ETFs and securities lending is essential for investors navigating this complex and rapidly changing financial landscape. As we move forward, continued attention to regulatory developments and market dynamics will be vital in shaping the future of this asset class.
Fixed income ETFs also performed strongly, garnering US$301 billion in inflows. Additionally, active management strategies gained traction, particularly in fixed income, capturing 36 per cent of total flows. Thematic ETFs focusing on technology and clean energy continued to draw significant interest, while over 650 new ETFs were launched, breaking previous records. Among these trends, one of the most notable was the growth in popularity of leveraged ETFs, which have become increasingly appealing as volatility in cryptocurrencies has surged.
In recent years, the cryptocurrency market has experienced extreme volatility, leading to a surge in the popularity of leveraged ETFs. These financial instruments aim to provide amplified returns — often two or three times greater — of an underlying cryptocurrency or asset's performance. As investors seek to capitalise on the rapid price movements of cryptocurrencies, leveraged ETFs have emerged as a compelling option. However, the mechanisms behind these products involve complexities, particularly in the realm of securities lending, which plays a crucial role in their operation.
Top 5 revenue-generating leveraged equity ETFs January 2025
Leveraged cryptocurrency ETFs utilise derivatives, such as futures contracts, to achieve their desired leverage. This strategy allows them to magnify their gains (and losses) based on the performance of the underlying assets. However, the use of derivatives and the pursuit of leverage often lead to increased funding needs, which can strain the resources of ETF providers. To mitigate these costs, many providers participate in securities lending programmes, a practice that has become increasingly important in the context of all ETFs, not just those with leverage.
Íø±¬³Ô¹Ï lending involves ETF providers lending out securities — such as crypto-related stocks or the underlying assets of their ETFs — to generate additional income. This income serves as a vital source of revenue, helping to offset management fees and the costs associated with maintaining leveraged positions. Borrowers, including short sellers and market makers, pay a fee to access these lent securities, creating a mutually beneficial arrangement.
The growing popularity of leveraged ETFs has significantly impacted the demand for the underlying securities. As more investors flock to these products, the demand for the assets they track increases, thereby boosting the borrowing market for those securities. Borrowers may utilise the lent securities to hedge their leveraged ETF positions or execute arbitrage strategies, further fuelling market activity.
Market volatility, particularly in the cryptocurrency sector, tends to amplify the effects of leveraged ETFs. These funds often experience daily rebalancing to maintain their leverage ratios, which can lead to heightened volatility in the underlying securities. This volatility, in turn, increases the demand for stock lending, as traders seek to short overvalued or mispriced securities or hedge against movements related to leveraged ETFs. The dynamic nature of the crypto market creates a fertile ground for trading strategies that leverage these products.
The daily rebalancing of leveraged ETFs not only influences their performance but also impacts the broader market. As these funds frequently buy and sell securities to maintain their leverage, they contribute to market liquidity, creating additional lending opportunities for the underlying assets. This interaction between leveraged ETFs and the securities lending market is a key aspect of their operation, as it helps to facilitate smoother trading conditions.
For ETF providers, the income generated from securities lending is a crucial revenue stream, particularly in the highly volatile cryptocurrency market. This revenue helps to offset the costs associated with derivative positions and the leverage employed by the ETFs. As the demand for leveraged ETFs continues to grow, the significance of securities lending as a financial strategy will likely increase.
In conclusion, the rise of leveraged ETFs in the cryptocurrency market reflects a growing appetite for high-risk, high-reward investment strategies. As volatility increases, the role of securities lending becomes ever more critical in supporting these products and enhancing market liquidity. Understanding the interplay between leveraged ETFs and securities lending is essential for investors navigating this complex and rapidly changing financial landscape. As we move forward, continued attention to regulatory developments and market dynamics will be vital in shaping the future of this asset class.
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