qandaQ: What’s the matter with leveraged funds? 

Q: I have enjoyed your series on the performance of the asset classes and funds you recommend. What do you think of adding leverage to these asset classes through the leveraged mutual funds or ETFs? 

A: I am not a fan of buy and hold investors or market timers using leveraged funds. Investors should be very careful using leveraged funds or ETFs to access the asset classes I am discussing in my Performance series. Rydex and ProFunds have offered souped-up funds for many years. For the 10 years ending 1/31/14, the Rydex 2X S&P 500 Fund (RYTNX), using 100% leverage, made less than the index (7.7% vs. 8.1%), without leverage, but at twice the risk. I know market timers think they can harness the risk and make better returns but the evidence isn’t very strong. According to Morningstar the average “investor” return with the leveraged fund is about 2.5% a year less than the fund. Bottom line: The average investor in RYTNX made almost 3% a year less than the S&P 500 for 10 years, at twice the risk. If you are interested in why the leveraged funds perform so poorly read this article.