As the market rebounded from the Liberation Day tariffs, gold miners, Bitcoin, and, yes, tech were among the winners. By Lewis Braham

If there's one good use for leveraged single-stock exchange-traded funds, it's as a competence test. If your financial advisor recommends one, he failed and should be fired immediately.

Such ETFs have encouraged a double-or-nothing mentality in a market that has increasingly resembled a casino, with wild ups and downs. Yet it's easy to see the temptation to roll the dice when the $923 million GraniteShares 2x Long COIN Daily ETF (ticker: CONL), which uses leverage to amplify its exposure to cryptocurrency exchange Coinbase Global, soared 233% in three months, while the more pedestrian $1.4 trillion behemoth Vanguard S&P 500 ETF $(VOO)$ gained a mere 10.9%.

Over 30 leveraged ETFs were launched in the second quarter, promising to double the daily returns of specific stocks, with an alphabet soup of ticker symbols -- everything from Defiance Daily Target 2X Long ARM (ARMX) to Leverage Shares 2X Long XYZ Daily $(XYZG)$. Over 70 have launched this year. Given their supercharged nature, they will almost certainly land at the top or bottom of the performance rankings each quarter. But over the long term, it is just as likely they will be lousy investments.

The most popular, the $6.1 billion Direxion Daily TSLA Bull 2X Shares (TSLL), promises to double the daily returns of Tesla. The stock has been on a roller-coaster this year, due to consumer boycotts and Elon Musk's on-again/off-again relationship with President Donald Trump. Because the leverage for these ETFs is based on daily returns, they don't perform as one would hope over longer periods, especially in volatile markets. Tesla was down 21.3% in 2025 through June 30, but the ETF fell 56.6%, requiring a 130.4% gain to recover -- almost five times the 27% return needed for the stock. Even if you like Tesla, forget this ETF.

Despite significant volatility early on, the quarter ended well for the broader market. The Vanguard S&P 500 ETF fell 12% from April 2 through April 8 after Trump announced steep tariffs, only to recover after he delayed them. Wall Street traders embraced the acronym TACO, for Trump Always Chickens Out, for playing this phenomenon. Buy after he announces a tariff and the market falls, sell after the market recovers when he backs down. Rinse and repeat.

While the president may increasingly sound like the boy who cried tariffs, it would be foolish to ignore his administration's edicts. Along with a Republican congress' support, Trump is largely responsible for last quarter's cryptocurrency rally -- from moving to establish a national cryptocurrency reserve, to hosting a Digital Asset Summit, to his family launching a Trump-branded crypto business, to his enthusiastic endorsement of the Senate's "Genius Act," which would regulate stablecoins, a form of government-backed crypto used to trade for other tokens. All of this activity legitimizes an asset class that is eroding the U.S. dollar's status as the world reserve currency and is controlled by a handful of wealthy individuals. The top 2% of Bitcoin wallets own over 93% of the outstanding Bitcoin supply.

For better or worse, retail investors can now go along for the ride. Morningstar's digital assets fund category was the quarter's best performer, with the average fund rallying 27.9%. The popular $75 billion iShares Bitcoin Trust $(IBIT)$ was up 29.5%. Technology funds also recovered from the first-quarter downturn, when they lost 10%, gaining 23% on average last quarter. The largest tech ETF, the $100 billion Vanguard Information Technology $(VGT)$, gained 22.4%, while the tech-heavy $353 billion Invesco QQQ (QQQ) gained 17.8%.

But tech's dominance is an old story. What's new is the resurgence of foreign and gold-mining stocks. The quarter saw a sharp rise in foreign small-cap stock funds. The average foreign small/mid growth fund surged 18.5%, the third-best-performing fund category, followed closely by foreign small/mid blend and foreign small/mid value, up 16.8% and 15.2%, respectively. The Hood River International Opportunity fund (HRIIX) was one of the quarter's best foreign small/mid growth performers, up 26.8%, yet its portfolio of stocks has a 14 average price/earnings ratio, much less than the S&P 500 index's 22 P/E or even the 15 P/E of the U.S. small-cap fund iShares Russell 2000 $(IWM)$. The Russell ETF gained only 8.5% by comparison.

Foreign large-caps are also interesting. The average foreign large blend fund gained 11.7% in the quarter, and the popular $493 billion Vanguard Total International Stock index fund $(VXUS)$ gained 12.1%. It has a 14 P/E. Year to date, the Vanguard ETF is up 18.3% versus the Vanguard S&P 500 ETF's 6.2% and the Invesco QQQ's 8.2%.

Precious-metals stock funds invested in gold miners continued their surge, up 16.3% last quarter and an eye-popping 50.5% year to date. This is understandable, given how in past years miner stocks lagged behind gold bullion and are now playing catch-up. The $101 billion SPDR Gold Shares ETF $(GLD.NZ)$ gained 5.4% last quarter and is up 25.7% this year -- also understandable, given investors' anxiety recently about inflation and geopolitics. Yet gold is meant to be a stable portfolio hedge, more so than a speculative play, so this rally may be due to cool off. Miner stocks are especially volatile.

Arguably the best value today can be found in bond funds, which posted meager returns last quarter, despite having far juicier yields than in the past. The popular $129 billion iShares Core U.S. Aggregate Bond index fund $(AGG)$ gained only 1.2% in the quarter. Active managers tend to have an edge in bonds. The $182 billion Pimco Income fund (PONAX) delivered 2.1%, which still pales in comparison to equity funds. Interestingly, one bright spot has been emerging markets local-currency bond funds, gaining 7.7% on average, in part because investors seeking to diversify away from the U.S. have been buying up foreign stocks and bonds.

Long-term asset-flow trends continued, with some important nuances. Money continues to flow out of mutual funds and into ETFs. So, for instance, while all U.S. equity funds received $3.9 billion in inflows from April 1 through May 31, U.S. equity mutual funds by themselves saw $45 billion in outflows. (June asset flow numbers aren't available yet.) The Vanguard S&P 500 ETF saw $30.5 billion of equity fund inflows, counteracting equity mutual fund losses.

Similarly, short-term bond funds and money-market funds continue to see strong inflows, while funds investing in bonds with longer maturities suffered outflows. Investors want income but fear inflation will hurt longer-term bonds.

More interesting are the flows to alternative funds, which hedge against downturns. Funds in the equity market neutral category saw $1.4 billion of inflows, and mutual funds dominated this category, as such complex strategies can be trickier to manage in ETFs. Two top funds, BlackRock Global Equity Market Neutral (BDMAX) and AQR Equity Market Neutral (QMNNX) received most of the influx -- $899 million and $424 million, respectively, for all of their share classes. These funds performed well during the April 2-8 correction, with AQR losing only 1.4% and BlackRock gaining 0.4%. Both are doing well this year, with AQR up 14.3% and BlackRock 8.2%.

Yet while market-neutral funds make excellent diversifiers, they have their own risks. Both of the aforementioned funds employ copious amounts of leverage, but unlike leveraged single-stock ETFs, they spread their bets over hundreds of stocks and bet both for and against stocks via short positions to balance their portfolios out.

Still, there are risks to every investment. The most resilient portfolios have a mixture of different ones.

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(END) Dow Jones Newswires

July 04, 2025 21:30 ET (01:30 GMT)

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