There are risks in the market that feel obvious, like volatility, interest rates, and inflation. Then there are the risks that don’t feel like risks at all until it’s too late. And they could be hiding in plain sight.

I was probably in fourth grade when I went to my friend Timmy’s house. He lived on a farm that backed up to a firing range at Fort Campbell. And somehow – this still feels unbelievable – if there wasn’t active firing going on, he was allowed to go out and look for unused bullets and unexploded ordnance. Then he’d bring them home, and his dad would help him extract the gunpowder.

Timmy had coffee cans full of it.

I remember sitting out there with him, no adult really paying attention, spelling words in gunpowder and lighting them on fire. Watching the lines spark and burn felt harmless enough…until it didn’t.

At one point, we made a pile. A big one, just to see what would happen. We rigged up some kind of fuse and lit it. The flame shot up higher than we were.

By nature, I was a cautious kid – the kind who followed rules, looked both ways twice, didn’t take unnecessary chances. And yet, there I was, playing with something I didn’t understand. Taking on risk I couldn’t measure. Completely unaware of how badly it could have gone.

I think about that moment a lot when I look at certain corners of today’s market.

Some Risks Are Easy to See. Others Aren’t.

Most investors recognize obvious risks, like a volatile stock market or the possibility of a recession. Those risks tend to make headlines and are easy to identify. The more dangerous risks, however, are often the ones that don’t feel especially risky because they’re packaged in a way that seems familiar, exciting, or even innovative.

Leveraged exchange-traded funds (ETFs) are a good example. These funds promise to deliver two or even three times the daily return of an index or, in some cases, a single stock. Today, investors can even buy products that provide 2x or 3x exposure to popular companies like NVIDIA. On the surface, that can sound like an easy way to boost returns.

After all, if you believe a stock is going to rise, why not amplify the gains?

The answer is that these investments are far more complex than they appear. While the potential upside gets most of the attention, the additional risk – and the way these products actually work over time – is often overlooked. That’s where many investors can find themselves taking on far more risk than they ever intended.

Leverage Is Powerful… in Both Directions

Leveraged ETFs aren’t just regular investments with the potential for bigger gains. To create that extra exposure, fund managers use derivatives, options, swaps, futures, borrowing, and other complex strategies. Those tools make it possible to magnify returns, but they also introduce additional costs and risks that many investors don’t fully understand.

Perhaps the most important thing to know is that these funds are designed to track daily returns, not long-term performance. That distinction is easy to overlook, but it’s critical. Because leveraged ETFs reset their exposure every day, their returns compound differently over time. During periods of market volatility, that daily reset can cause performance to drift significantly from what investors might expect.

For example, imagine an investment falls 20% one day and then gains 25% the next. The underlying investment is essentially back where it started. A leveraged ETF, however, may not recover in the same way because each day’s return is calculated from a different starting point. Over time, this effect – often called volatility drag – can steadily erode returns.

In other words, you can be right about the long-term direction of an investment and still lose money because of how the product is structured.

Why These Products Often Disappoint Long-Term Investors

One of the biggest misconceptions about leveraged ETFs is the belief that if the underlying investment eventually recovers, the fund will recover right along with it. That assumption seems reasonable, but it’s often not how these products work.

Unlike a traditional stock or a broad-market ETF, leveraged ETFs aren’t designed to reward patient, long-term holding. Their goal is to deliver a multiple of an investment’s daily return, not its return over months or years. Because of the way they reset each day, combined with the costs of maintaining leverage, a significant decline can be difficult – or even impossible – to fully recover from, even if the underlying investment eventually rebounds.

That’s why leveraged ETFs are generally considered trading tools rather than long-term investments. Many professional traders use them to express a short-term market view, sometimes holding them for only a single trading day. For investors saving for retirement or building long-term wealth, they’re usually not designed for the type of buy-and-hold strategy that has historically served many investors well.

Before investing in anything that promises amplified returns, consider asking:

• Do I understand exactly how this investment works?
• Is this designed to be held for years or just for a day or two?
• What happens if the market becomes volatile?
• Am I investing because it fits my financial plan, or because the potential gains sound exciting?
• If I lost 30% or more quickly, would I understand why it happened?

Excitement Isn’t an Investment Strategy

As kids, my friend and I thought we were just lighting piles of gunpowder for fun. We weren’t trying to be reckless; we just didn’t appreciate the risk sitting right in front of us.

Investing can feel surprisingly similar.

Some of the biggest risks aren’t the ones that look dangerous. They’re the ones that seem exciting, simple, or like an easy shortcut to higher returns.

Curious whether every investment in your portfolio still fits your long-term plan? We’d be happy to review your strategy and help you understand where unnecessary risks may be hiding.

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