The Leverage Paradox: Do Multi-Powered Funds Pay Off in the Long Run?

The saying "no one wants to get rich slow" is attributed to Warren Buffett. Buffett, the most famous capital market investor of the past three decades, sought to explain that investors must arm themselves with time and patience and evaluate their investments over the long term. This contrasts with human nature, which manifests significantly in the capital market by seeking shortcuts that include investing in speculative stocks, timing the markets, and chasing hot trends. In doing so, savers expose themselves to excessive risks that harm them, while the safe path to building true wealth requires restraint, and above all, a long and unsexy journey.

Surprisingly, a recent study conducted in the US regarding a leveraged fund on the Nasdaq shows that even in leveraged funds, holding leveraged funds over time and avoiding selling them even during crises benefited investors. Thus, investing in the TQQQ fund, which attempts to provide three times the daily return of the Nasdaq 100, showed that 10,000 USD invested in it at the beginning of 2010 would have turned into 2.5 million USD by early 2026. Our review found that the return up to October 2026 would have already brought the return to over 36,000 percent, meaning reaching 4 million USD. However, along the way, the investor would have had to survive a drop of over 80%. Investing 10,000 USD in a fund that regularly tracks the Nasdaq over the same period yielded a profit of "only" 261,000 USD.

In Israel, there are leveraged exchange-traded funds (ETFs), leveraged tracking funds, and even leveraged managed mutual funds that are not hedged against foreign exchange rates. Broadly speaking, leveraged funds manage nearly 4 billion shekels. This is a low amount of less than half a percent of the mutual fund industry, the primary industry for short-term savings, yet it is difficult and always commands a lot of attention due to its sharp changes. Mutual funds and leveraged ETFs have gained a negative reputation over the years, mainly because they are perceived as an instrument unsuitable for long-term investors.

The central reason for the negative reputation is that their leverage resets at a regular frequency, daily or monthly, and therefore the cumulative return is not simply "two times" or "three times" the index return. Various studies conducted on the US stock market have shown that the longer the investment horizon, the more volatility and periodic resetting can create a large gap between the fund's performance and its stated multiplier. In a particularly volatile market, volatility can erode the investment even if the index itself ends the period with only a moderate change, and it is certainly not intended for the faint of heart.

Leverage Does Not Necessarily Destroy Returns

This is one of the reasons why regulators in the US have warned over the years against long-term holding of leveraged products without understanding the reset mechanism and the dependence on the return path. However, this phenomenon is well documented in academic studies. For example, a 2012 study by Jun Wang, Lei Lu, and Ge Zhang published in Financial Services Review states that leverage does not necessarily "destroy" returns over time. In a rising and continuous market, where positive return is strong enough relative to volatility and financing costs, leverage can actually greatly amplify the compound interest effect accumulated over time.

The attached table of Israeli funds (which includes only funds with assets greater than 50 million shekels and a time horizon exceeding 3 years) clearly illustrates the paradox of leverage. On the one hand, those who held leveraged funds on Tel Aviv indices over the past three years enjoyed returns of hundreds of percent, up to over 500% in a triple-leveraged fund on TA-35. On the other hand, the large gaps between funds and measurement periods show why they cannot be treated as a simple version of the index with "two times" or "three times" the return. The result depends heavily on the path the market took, volatility, and the reset frequency of the leverage.

To this are added relatively high management fees, which in some cases reach 3.6% per year. Interestingly, the largest leveraged funds are Ksam ETF Leveraged TA-35 x3 Monthly, managing 600 million shekels, and Ksam ETF Leveraged Nasdaq 100 x3 Monthly, managing 530 million shekels. When examining longer periods, the comparison becomes very interesting. Migdal Nasdaq Double, established in November 2000, currently trades at a redemption price of about 1,815 points compared to a base price of 100, meaning a cumulative return of about 1,715% since launch. Migdal Maof Double, established in June 2003, rose from about 100 points to about 1,426 points, a cumulative return of about 1,326%.

A Small Gap from the Index Over Decades

The local example also clearly illustrates the potential erosion of leverage over time. Migdal Maof Double, established in June 2003, has since risen by 1,326%. During the same period, the TA-25 index, which later became the TA-35, rose by about 1,182%. In other words, the leveraged fund did outperform the benchmark index, but by a relatively small margin and certainly nowhere near twice the cumulative return. This is a classic illustration of the fact that periodic leverage is not equivalent to a simple doubling of index return over decades, mainly due to volatility, leverage resetting, and management fees.

The overseas example looks different. Migdal Nasdaq Double, established in late November 2000, has risen by about 1,715% since then, while the Nasdaq 100 index rose by about 1,064% over the same period. Here too, the fund did not produce twice the index return, but it did generate a very significant advantage over nearly 26 years.