Investors Are Flocking to Leveraged ETFs as Risk Appetite Surges

Assets under management (AUM) in U.S. leveraged ETFs have soared to an all-time high of $135 billion, surpassing the previous record of approximately $130 billion set in February 2025. This milestone highlights a growing risk appetite among investors and underscores a powerful trend: the sharp rise in speculative trading instruments during prolonged bull markets.

Since 2020, the leveraged ETF market has expanded rapidly, fueled by unprecedented stimulus programs and a broader retail investor boom. Over the last two years alone, total leveraged ETF AUM has doubled, signaling increased demand for high-volatility, high-reward products.

What Are Leveraged ETFs and Why Are They So Popular?

Leveraged ETFs are financial instruments designed to amplify the daily returns of an underlying index or sector—often offering 2x or 3x exposure. For instance, if the S&P 500 rises by 1% in a day, a 2x leveraged S&P ETF would aim for a 2% return. Some ETFs also offer inverse exposure, generating gains when the benchmark index declines.

Their appeal lies in accessibility: investors don’t need margin accounts or options knowledge to gain amplified exposure. As a result, these funds have become attractive to day traders, retail investors, and even institutions seeking to chase returns during periods of bullish momentum.

A Surge in Flows, but Not in Fundamentals

The massive inflow into leveraged ETFs reflects more than just optimism—it reflects behavioral biases and momentum-driven speculation. These instruments are not intended for long-term holding, and their structure can lead to value erosion due to daily compounding effects and market volatility.

Historical data suggests that many leveraged ETFs underperform their benchmarks over periods longer than one month, especially during choppy markets. Yet despite these risks, over 70 new leveraged ETFs have launched in 2025 alone, a sign of both demand and asset managers’ willingness to capitalize on investor exuberance.

From $60B to $135B in Two Years: A Rapid Expansion

Back in mid-2023, total AUM in leveraged ETFs stood at around $60 billion. Fast forward to July 2025, and the figure has more than doubled. This steep climb reflects an environment saturated with liquidity, optimism, and—some would argue—complacency.

While the growth is eye-catching, it also raises red flags. Many of the new entrants in the leveraged ETF space are retail investors with limited experience in managing downside risk. In some ways, the rise mirrors other speculative waves such as meme stocks, cryptocurrencies, and zero-day options.

Should Regulators Be Concerned?

Despite the surge, leveraged ETFs still represent a relatively small portion of total ETF assets in the U.S. However, their impact during periods of volatility can be outsized. As investors chase short-term gains with increasingly aggressive tools, concerns grow over potential market dislocations should sentiment shift.

Financial watchdogs have largely stayed on the sidelines, but with growing evidence that retail investors are using leveraged ETFs as long-term bets, calls for greater investor education and potential regulation are mounting. Some experts argue that these products, while legal, may be inappropriate for the average investor.

Are We in the Late Cycle of a Bull Market?

Soaring interest in leveraged products often accompanies late-stage bull markets, when valuations are stretched and investors fear missing out more than they fear losses. The chart showing AUM growth is parabolic, reminiscent of late-cycle behaviors seen before corrections in 2000, 2008, and 2022.

As long as markets continue to trend upward, leveraged ETFs can deliver impressive short-term gains. But in the event of a sharp downturn or prolonged sideways market, many of these funds may experience accelerated losses, leading to forced selling and increased market volatility.

Final Thoughts: When Easy Money Clouds Risk Awareness

The record-breaking $135 billion in leveraged ETF AUM should not be viewed in isolation. It is a symptom of a broader market narrative where risk-taking is being rewarded—at least for now. But as seasoned investors know, the tide can turn quickly.

Leveraged ETFs can be powerful tools when used correctly—primarily for tactical, short-term trades. However, when deployed as part of a long-term strategy without full understanding of their mechanics, they can become dangerous traps.

Investors and advisors alike would do well to reassess their exposure and ensure that performance isn’t being pursued at the expense of discipline and prudence. In the current climate, the riskiest move may not be missing out—it may be overstaying the party.