Legendary investor Warren Buffett has said more than once, “If you’re smart, you don’t need leverage.”

So Buffett is not a fan of leverage. That’s easy for him to say, isn’t it? His net worth is more than $100 billion. What about those of us who don’t have a few billion dollars of cash in the bank? What’s wrong with a little leverage?

Now it’s time to examine some leveraged single name exchange-traded funds (ETFs) to see how they work and whether they’re suitable for the average investor. Let’s get started.

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What are leveraged ETFs anyway?

Let’s start from the beginning: Leveraged exchange-traded funds are investment products that use derivatives (stock options) to generate returns that amplify the price fluctuations of an underlying asset.

A leveraged ETF could thereforeFor example, try to double the daily return in a stock market index such as the S&P 500.

However, with GraniteShares ETFs, the funds aim to increase the daily returns of a single stock. The company offers funds for several high-profile stocks, including Apple, AMD, Amazon, Alibaba, Coinbase Global, Meta Platforms, NVIDIAAnd Tesla.

Some of the company’s funds are long, others are short. The long funds aim to double the daily positive return of a particular stock. For example, the company’s funds GraniteShares 2x Long NVDA Daily ETF (NVD -2.91%) aims to double the percentage return of Nvidia stock – if Nvidia stock rises by 2% in one day, Funds Goals to generate a return of 4% on the same day.

The short funds work the same Away, but the other way around. For example, the GraniteShares 2x Short NVDA Daily ETF tried to Negative daily return of Nvidia shares. In this case, if Nvidia shares fall by 2%, the Funds should generate a positive return of 4%. Likewise, a 2% increase in Nvidia shares should mean a 4% loss for the ETF.

Why leveraged ETFs are not for long-term investors

At first glance, leveraged ETFs could seem a great Idea for the long-term investor. If someone is optimistic, let’s say NVIDIAwhy not be twice as optimistic?

Like many things in life, however, it is more complicated.

Leveraged ETFs are not designed for for long-term investing – and you don’t have to just take my word for it. Here is the investment objective of the GraniteShares 2x Short NVDA Daily ETF from the GraniteShares website:

“The Fund seeks daily investment results before fees and expenses of -2 times (-200%) the daily percentage change in NVIDIA common stock. Corp

There is no guarantee that the fund will achieve its stated objective.

The Fund should not be expected to generate twice the cumulative return of NVDA for periods longer than one day.”

Two things should be clear right from the start:

1. The Funds does not guarantee that the performance will meet the stated objective.
2. The Funds is not designed to achieve leveraged returns for any period longer than one day.

Both caveats are of enormous importance to the long-term investor. First, the advance knowledge that a fund may not achieve its stated objective should give investors pause for thought. Second, by noting that the Funds should not to be expected To achieve leverage for more than one day, are informative for whom this type of product is suitable — short-term traders.

Over and beyond Funds charges a huge fee. The Cost ratio for the GraniteShares 2x Short NVDA Daily ETF is at a staggering 1.74%. This means that an investor who invests $10,000 in the Funds will pay $174 annual fee. For comparison: Vanguard S&P 500 ETF – one of my favorite ETFs – has an expense ratio of just 0.03%, meaning that for every $10,000 invested, an investor pays just $3 in fees per year.

In summary, Buffett may have been on to something after all. Leverage often comes with strings attached. For the vast majority of investors, it’s best to keep things simple. A standard index fund with a low expense ratio is a much better alternative than a leveraged single-stock ETF.