Recently, many investors have misconceptions about leveraged ETFs, thinking that buying them can lead to stable profits, but in reality, the risks are much greater than imagined. Today, let's talk about what leveraged ETFs really are and why they are not suitable for most people to hold long-term.

First, the conclusion: leveraged ETFs are usually only suitable for short-term trading, not long-term investing. There are two core reasons behind this—compound interest effects and volatility decay. I'll illustrate with a simple example: suppose an index rises 10% on the first day and falls 10% on the second day; it seems to return to the original level. But if you hold a 2x leveraged ETF, it would rise 20% on the first day and fall 20% on the second day, ending up with a 4% loss instead of breaking even. This is the trap of leveraged ETFs.

So how do leveraged ETFs actually work? In simple terms, they amplify the daily returns of the underlying index through derivatives like futures and options. For example, a 2x leveraged ETF, if the index goes up 1%, it goes up 2%; if the index drops 1%, it drops 2%. It sounds very attractive, but the daily rebalancing mechanism continuously eats into returns in volatile markets.

Inverse ETFs operate on a similar principle, providing returns opposite to the index, suitable for short selling or hedging risks, but similarly not suitable for long-term holding.

Are there situations where holding leveraged ETFs long-term makes sense? Indeed, there are—namely in a "bullish trending market." For example, after the COVID-19 crash in March 2020, the S&P 500 entered a prolonged upward trend lasting over a year. In such a market, holding leveraged ETFs can truly generate profits. But such conditions are rare.

Most leveraged ETFs on the market offer 2x or 3x leverage. In the U.S. stock market, popular leveraged products tracking the Nasdaq include 3x long and short ETFs, as well as related leveraged ETFs for the S&P 500.

If you really want to amplify gains with leverage, there are certain types of investors suited for leveraged ETFs: experienced traders with high risk tolerance who can monitor the market closely for short-term trades. Conversely, long-term investors, those with limited risk capacity, or people without time to watch the market, should stick to traditional ETFs.

Finally, a reminder: leveraged ETFs are based on derivatives, not stocks, so they do not pay dividends. Also, choose leveraged ETFs with high trading volume to avoid large bid-ask spreads. Overall, leveraged ETFs are a double-edged sword; if misused, they can accelerate losses.