ETF Edge - Caveat emptor: will retail investors get burned by their own fire for returns? 12/1/25

Episode Date: December 1, 2025

A new study finds more than 90% of increasingly complex single-stock, leverage and inverse exchange traded products are owned exclusively by retail investors chasing outsized returns. Billions of dollars have been piled in. But that was in a breakneck bull market that’s showing signs of cracking.    Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, you're in the right place. Every week, we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm your host, Dominic Chu. Now, a recent study finds the majority of leveraged, single stock, and inverse exchange-traded products are owned by retail investors who have put billions of dollars into them. But that's been in a bull market. And now volatility is swinging back in a very significant way. Here is my conversation with Mike Co, strategist at YieldMax, co-founder of OpenIninterest. Pro and a CNBC contributor alongside Nate Geraci, president of Novodias Wealth Manager. Mike, we're going to start with you first about this, because we often look to you, as the guy who tells us a lot about the state of the options trade, what the options market can tell us.

So let's take this discussion towards just how the ETF markets have grown and developed and evolved into one that embraces the use of derivatives and options-based strategies so much more. Yeah, I mean, one of the things we've certainly seen is that the compound annual growth rate for the options market over the course of the several decades now that I've been in it has outpaced equity volume growth quite substantially. And one of the things about trading options is that because they expire and as we've seen a proliferation first of weekly options and now dailies in some cases, this is not something that most retail investors can really logistically manage on their own. If you have a job or if you're doing anything other than sitting in front of your screens,

you know, finding a product where essentially someone else can handle some of that for you, if you're interested in, say, selling covered calls or doing something like that, this sort of democratizes those products. That's the good news. Of course, the bad news is that, you know, sometimes, you know, the investor's education or understanding of both options and some of these products isn't keeping pace with their rapid development and issuance. Mike, to follow up on that, we've spoken at length about some of these. types of ETF products about how many of them that have these leveraged or inverse type situations or sometimes both in a combination are tracking daily type performance for some of the underlying

assets. It seems to go without saying, but there are still a great number of users of these types of products who may not understand fully about what those risks are if they are daily reset type products, right? Yeah, I mean, well, there's a couple things that are going on here. I mean, some of them are using something called total return swaps. That's a popular way for some of the lightly levered ETFs to operate. But there are other ones that are using options. And when they do that, in order to achieve that leverage that they advertise, they have to engage in some fairly regular adjustments to the underlying portfolio. And if you get a very choppy or volatile market, that can introduce a tracking error. And the larger issue, of course, that investors need to remind.

themselves of is that leverage is a very appealing thing when the only thing you've noticed over the course of the last couple of years is that prices are rising but having leverage is a double-edged sword and of course if you start to see things roll over and a couple areas have rolled over pretty precipitously as a lot of folks watching probably have noticed and a levered product can can struggle in those environments it's going to underperform the underlying asset in some instances and of course if you have a lot of that choppiness where things are whipping back and forth and the PMs of these funds are struggling to essentially keep pace, that also can introduce some tracking problems, you know, irrespective of the leverage. Now, Nate, many of these products are in the market right now. I've come to market because there has been some underlying demand for these types of instruments that traders and investors in some cases want to use these levered and inverse ETFs as if more efficient ways to try to gain access to some of those types of views. how much has this market grown over the course of just the last, say, five years since the pandemic versus what we've seen in the past, and just how much more demand can we see for these inverse and leverage products

based upon the current trajectory in the markets vis-a-vis the volatility regime that we've now seen and are now maybe going to see in the coming year? Well, just in terms of the expansion of the market itself, just this year, there have been over a thousand, new ETFs launch, which is a record, and we still have a month ago, but out of those thousand plus ETFs, about a third are using some form of leverage. And then you add to that just the derivatives usage, various options-based strategies and such. And, you know, there's certainly a lot of supply coming to market, but there are a lot of landmines out there for investors as well if they don't understand how these products work. And I've really observed two primary trends that

I think are at play here. The first one is just that I think there's been a significant mind shift among particularly retail investors over the past several years. And I'm not sure if this goes back to the pandemic time frame when there were a lot of investors sitting around trading. Maybe crypto was influenced this a little bit. But if you talk to retail investors, and I would say especially younger investors, the idea of only getting, say, an 8 or 9% historical stock market return seems ludicrous to some of them. That's way too low. And so they're actually seeking out these riskier products with the potential for astronomical returns. I think the other trend at play here is that there's essentially an arms race among ETF issuers to see who can offer the potential

for those astronomical returns, right? Who can offer the most leverage or the highest distribution rates to try and attract those investors? And Dom, I think the reason why, is if an issuer can hit on just one or two of those ETSs, that's the difference between staying in business or folding up shop. In other words, if an ETF issuer launches, say, 10 or 15 leveraged single stock ETS, all it takes is for one of those to catch on with retail investors, and it can be a huge revenue generator. Because if you look at the fees on these ETSs, they're typically pretty high. They're not cheap. So I think that's the other key trend. And something else we should mention here too is that those issuers don't have to compete with the largest issuers in this category.

You're not competing with Vanguard and iShares and State Street because those firms aren't launching these types of products. And so if you're an issuer, you don't have to deal with that. So I think it's really the rise of the retail investor who's seeking higher returns and maybe what historically has been considered normal. And then issuers responding in kind bringing the supply to market because it can be very lucrative. Nate, let's follow up on that because you head up a wealth management firm. You have clients who you construct portfolios for, you help manage their money. I mentioned before that a lot of the driver behind this kind of levered and inverse ETF boom, so to speak, has been from individual retail type investors, not necessarily

institutional ones. To what degree do registered investment advisors, wealth managers, actually use these types of levered and or inverse products as part of their portfolio construction, is it something that is a tool for them or something that's being reserved more to your point for some of the real alpha-chasing kind of individual traders and investors out there? I think it really depends on the underlying strategies that the advisor is running. If they're running more tactical trading type strategies, then certainly using leverage or inverse products can come into play and that may make sense. But for longer term allocators, which I think

are the majority of financial advisors, they're not touching many of these products with a 10-foot pole. Okay. Now, Mike, we talk a lot about the fees and Nate just brought it up, this idea that we do see some of these types of funds with higher fees than some of the index tracking instruments that we're used to talking about here. It goes without saying maybe that the reason those fees are higher is because it does have a more complex nature and the use of instruments underlying some of these strategies. With regard to fees, how much more advantageous is it for an individual or trader or investor to understand or learn about the use of futures and options and implement strategies on their own versus paying the above index level type

fees for actively managed funds to have an ETF strategy try to to mimic some of those options-based strategies. Yeah, I mean, I think it's worth first just talking about, you know, what the scale and scope of those fee differences are. You know, it's not uncommon for a lot of these options-based ETFs. And we run several ourselves to have fees of 99 basis points or, you know, basically 1%. Compare that to, you know, an S&P 500 strategy, which might have fees of 15 basis points, or in some cases substantially even less than that. But these are very active strategies.

So is there an advantage for investors to learn about futures and options and potentially do it themselves? Well, there's a couple potential advantages in that. But there's also something really critical, which is that if you're buying these products, you probably ought to understand the underpinning securities and futures that they trade. So I think investors do need to educate themselves about this

because then they're going to know what they're buying. and then they can make that determination. Well, if it's trading weeklies, that's a lot of trading. And maybe they don't have time for that. And maybe paying 1% of the assets to have a professional do that on their behalf makes a lot of sense. But it is critical that they understand what they're getting because in many cases you have ETFs that might be trading levered total return swaps or, as you had earlier pointed out, you know, you have some that are trying to offer some convexity but are constantly changing their positions. And, you know, if you don't know the difference between a fund like that with big distributions and one that's, for example, selling covered calls, which is almost the opposite kind of an option strategy, you really don't know what you're getting. And when volatility increases, you want to know what you have because then you're going to have a better understanding of why it's behaving the way it does. This is also, Nate, an interesting kind of juxtaposition with regard to some of these levered and inverse ETFs compared to some of the growth that we've seen in defined outcomes.

ETS, right? The ones who try to target a certain type of either income level, return level, or something to that degree. If you take a look at the dynamic between levered slash inverse versus the kind of these defined outcome or structured product type ETFs, how exactly do traders or investors or ETF users actually start to maybe incorporate those from a structural level into their portfolio or risk management construction? I think with defined outcome ETFs, well, there is certainly some complexity with what's going on underneath the hood in terms of the option positions themselves. I think for most investors and certainly financial advisors, they're easier to get their head around what those products are going to do because they have defined outcomes. You know what your upside cap is. You know what the downside buffer is.

I think with leverage and inverse products, clearly there's the potential for significant losses. You don't know exactly what you're going to get. And so that's why, you know, going back to our discussion earlier, I don't think you see a lot of traditional financial advisors incorporating leverage and inverse products. But certainly in the defined outcome ETF space, we've seen significant adoption there. And I think we'll continue to see that. I still believe, you know, I agree with Mike, the democratization of products that the ETF wrapper has brought, including leverage and inverse. It solves problems in the market. It can be done more cost effectively. I just think that ultimately there are a lot of retail investors who don't understand how these work, and they end up getting burned at some point. I think it's pretty much inevitable on the retail side. Mike, if we take a look at the way that these markets have developed, can you,

Take us through maybe the thought process of what you're seeing in the broader markets, given what you've now witnessed, not just in these levered and ETF type products in terms of fund flows and fund demand, but also what the options market is telling you from an index or macro level about the economy and the markets overall. Is there anything that we can glean about just what traders and investors at that retail level are expecting, given the kinds of activity we're seeing in the options market, futures market, and these levered and inverse type ETFs? Yeah, I mean, so there's a couple things. And the jury is still out on at least one portion of this, which is that this is an area of the market, you know, relative to ETFs overall that's still quite small. But there's a lot of trading going on in these things. And so it'll be interesting to see whether these end up impacting the very markets, the options markets in particular that they avail themselves of so heavily. So that'll be interesting to observe. But one of the things we have certainly seen recently is a big uptick in.

the volatility of sort of the risk on, risk off space. That obviously involves crypto, but there's a lot of other high beta stocks that aren't crypto necessarily that have suddenly seen their correlations go up a lot. So you can take a fund, which, and some of these things are not really funds. They're single stock products with a derivative wrapper. Others really are funds. But what we've seen is that because the appeal of the real high volatility names is essentially driving a lot of this, that that that That is also the area where you start to see what I call conditional correlation. So hymns and hers and Palantir and names like strategy don't have that much in common from a business point of view, but they have a lot to do with each other when you start

to see some weakness in the market. Suddenly these things which were kind of dispersed originally start trading in line with one another and that ends up impacting these strategies as well. And so you're going to see that the relationship between the prices for options on things like the queues and some of the sort of sector-based ETFs, that those volatility are probably going to go up even faster than the volatility on some of the single stocks that are in them are going up, as you see that correlation rise. Yeah, the correlation convergence is something a lot of folks have been noticing as well

when we start to have bouts of this kind of volatility. Nate, many of these single, single stock levered inverse type ETFs. We've kind of compared them from a cost basis, from a cost perspective to some of the larger kind of underlying sector or even broad indices based ETF, these passive ETFs. One of the other things, though, that many of these smaller levered inverse type ETFs have is that they are, in fact, much smaller than, say, the S&P 500 spider ETF, to a very large degree, smaller than what we've seen before. Just how much does the boom in these issuances of these types of ETFs compare with the broader ETF market and just how much can we expect some of these funds to stay around? Many of them don't have a lot of assets under management

compared to some of their bigger cousins. Well, again, it brings up the two trends that I was discussing earlier, that this rise of a retail investor who was not content with historical stock market returns and then issuers happy to serve up these ETF options. And the way that I view this Dom is essentially both retail investors and ETF issuers are chasing lottery tickets. That's what these are. And sometimes they're going to hit. Sometimes they're not going to hit. And I think what happens longer term is, again, retail investors will probably ultimately have a bad experience with these products. And then they learn their lesson. And guess where they go? They go, you know what? I'm going to simply park my money in Vanguard index funds or whatever. And they'll take that eight or nine

percent historical stock market return. They think that seems like a good deal. So I call this the life cycle of a retail investor. And this isn't new, right? We've been in the markets for a long time. We've seen investors learn this lesson in the past. It's just that today they're learning that lesson through these risky leverage and options based ETFs. And so those products aren't going anywhere, we're going to continue to see issuers launch them. But I think you'll see some rise and be huge revenue generators and you'll see other that are just going to die on the vine. And that certainly presents some closure risk. Okay, both of you guys at some point alluded to in some way, some small way, the idea that crypto ETFs are now kind of part of this overall

conversation as well. I'd like to end with a couple of brief thoughts from you guys on that topic before we go. Mike, I'll go to you first on this. The crypto ETF industry right now has seen an explosive amount of growth. But we are now for the first time really seeing a downside bout of volatility with regard to crypto, Bitcoin especially. What is your outlook for some of these crypto-based ETFs given some of the real downside we've seen? And by the way, as of this show's taping, Bitcoin prices are now off from $125 plus thousand per Bitcoin to roughly around $85,000 to $87,000 right now. That's a pretty big drawdown.

It's a huge drawdown. And you know, you pointed out that there's been a real proliferation in the ETF space around crypto in particular. We run a couple of these. You know, we also run sort of plain Jane, you know, large cap covered call strategies. But it is things like strategy. It is things like YBit, which is one that trades on iBit, which is the Bitcoin ETF, those were the ones that really seemed to catch a lot of favor with retail investors because they were really going after those sort of astronomical eye-watering returns that Nate was just talking about. And we have certainly seen that there's been some pullback as we've seen this come back. Now, just with respect to Bitcoin prices, could they test, you know, get into the 70s,

for example. I think that's a possibility. I mean, that is the level from whence it broke out. It is the cost basis of strategies, Bitcoin holdings. And I think a lot of people are sort of shooting against that as a number. And, you know, I think what ultimately is going to lend some support is that, you know, you're getting at that point below the cash cost of mining. So that might create some measure of support. But volatility has a way of shaking out weak hands. And I think it's probably doing that right now. And Nate, over to you. What do we think about the crypto price action versus what we could expect to see from some of the

crypto-native ETFs? Well, first of all, with the spot Bitcoin ETFs, I think it's important to pull back, zoom out, and look at the performance over a longer-term timeframe. So Bitcoin is down over 30% since early October. But if you look back to when these ETFs launched in January of 2024, Bitcoin's up over 80%. So I think you have to keep that in mind. And if you look at flows recently, there have been outflows from spot Bitcoin ETFs about $4.5 billion over the past month. But if you look year to date, there's been about $22 billion in inflows for the year. And spot ether

ETFs, I think a similar picture. You know, they're down 40% since, since early October. But if you look at a longer term time horizon, you know, performance has been okay. There have been outflows here recently, but year to date, about $10 billion in inflows into those products. In terms of the market itself, Dom, I just think there was a lot of leverage in the category that needed to be flushed out. And I think that's what we're seeing now, some de-leverging in the space. That's been the primary driver of the recent weakness. I think in general, there was some broader weakness in the equity markets over the past month or two. We talked about some of the higher beta names. That correlation is starting to go to one. We saw volatility tick up. I think that, that's

That impacted crypto as well. That started the down move, and then the de-leverging exacerbated it. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Nate Geraci, president of Novodias Wealth, continues with us now. Nate, it was an interesting conversation with regard to risk, risk appetite, risk aversion, vis-a-vis what's happening with leveraged and inverse-type products. But I want to focus our podcast here on something that we ended with during the online show,

and that is just what's happening with crypto-based ETFs, given all the recent market volatility. As of right now during this podcast, Bitcoin prices are hovering around the 85 to 86,000 mark. We saw those record highs north of 125,000 just earlier this past year. how exactly do you see some of that dynamic and the pullback and drawdown in crypto playing out right now in the ETF market when it comes to crypto-based strategies? Well, I think it's important to separate Bitcoin from many of the other crypto assets. I think Bitcoin is often viewed as digital gold. Now, here recently, when there's been some weakness in the market, Bitcoin has pulled back.

It's pulled back significantly more than the broader market. And so that actually has some people questioning whether or not it is digital gold. My take on that is I think longer term, it's heading down that path to where it will act much more like the physical metal itself. But it's often referred to as gold, but as a teenager. It's still very volatile. It still has to prove itself over many market cycles. And I think that's what we're seeing now. I think other crypto assets are much more akin to technology plays.

And so when you see some risk off in the markets or you see some of the higher beta tech names in a drawdown, my expectation would be to see a lot of the crypto assets in a drawdown right alongside them. We've talked a lot in not just this show, but in other parts of CNBC in our broadcast air and our digital channels, about some of the correlations, these kind of trading relationships that we've seen develop between, say, the bigger crypto, So especially ones like Bitcoin and Ethereum, to your point, versus, say, the stock market, a lot has been made about how some of the correlations get very tight. The trading relationships, say, between Bitcoin and the NASDAQ 100, if you overlay, say, an iBIT, I-E-T-F versus the QQQ, which tracks the NASDAQ 100, a lot of times they start

to get very close in terms of their trading correlation. Do you envision that continuing, given the fact that we were starting to see a little bit more volatility on both the crypto and the stock side of things? I do because, again, I view many of the crypto assets as akin to technology plays. And so if there's weakness in tech or some of these other high beta names, I would certainly expect weakness in most of crypto. Again, Bitcoin, I think you can make an argument might react a little bit differently, though it hasn't here recently. And I think we have to remember that Bitcoin has only been around now for 15, 16 years. And so it's still going to have to prove itself as that digital store value over a longer period of time. I would say the track record thus far is mixed.

There have been periods. If you go back to earlier this year during the tariff tantrum in the months after that, Bitcoin actually performed very well. And I think that caught a lot of investors' attention that maybe this is a diversifier in a portfolio. And it can offer some of those properties that physical gold offers. But again, here more recently, we've seen this 30% plus pullback. And so I think the jury's still out. But again, longer term, I am optimistic that it does become that store of value. Just a few years ago, it was very difficult from a regulatory standpoint to bring any kind of an exchange traded product to market that tracked cryptocurrencies.

And back then, the conversation was just around things like Bitcoin in particular, and then maybe to a lesser degree, Ethereum-type products. Now, the market has exploded for exchange-traded products that track all different kinds of cryptocurrencies, not just Bitcoin and Ethereum. What exactly do you make of some of the price action that we're seeing in some of the underlying crypto products, say like a Solana or other parts of the crypto market, ripple for that matter, versus how the ETF markets are actually tracking some of those? How much do you think that the ETF market is going to be very, very tightly correlated on some of those smaller coins and smaller crypto products against the ETFs that track them? Well, first of all, to your point, just over the past month, we've seen spot Solana

ETFs from Bitwise gray scale Fidelity, 21 shares, Vanek, Canary. There have been spot XRP ETFs from BitWise, Grayscale Canary and Franklin Templeton. We've seen Grayscale and BitWise both launch Dogecoin ETFs. Canary launched an H-Barr ETF. Just this week, we're going to see Grayscale launch a Chainlink ETF. So the product proliferation here has been immense, and I think we're going to continue seeing that moving forward. You know, in terms of the underlying market, I think the way to look at this, let's take Spotsilana ETFs, for example. Since their launch over a month ago, they've done pretty well in terms of investor demand. They've actually taken a new money on something like

23 out of the 24 days since they first launch. The category itself is now over a billion dollars in assets. And then if you move over to spot XRP ETFs that launched less than three weeks ago, that category is already around $700 million in assets. And so that tells me that there is real investor demand here because those are pretty good numbers. And I think we'll continue to see those grow. How they impact the underlying market, I think remains to be seen because we still have to recognize that the ETFs are a small subset. of the overall market. I think something else that bears mentioning here, Dom, just in terms of demand,

you know, we've seen these other alt-coin ETFs that I mentioned, Dogecoin and H-Barr, chain link. My take on really all of these products has been that demand is going to mimic the underlying market caps of the crypto assets themselves. So in other words, if XRP's market cap is, say, 15 times smaller than Bitcoins, then I would expect spot XRP, they have 15 times less demand than what we've seen out of spot Bitcoin ETFs. I think that's how this is going to play out. Now, a meme coin like Dogecoin, that's a different animal, no pun intended. I'm not expecting financial advisors to allocate, you know, to Dogecoin in client portfolios. But I think for many of these other crypto assets, the underlying market

cap is a good proxy for what ETF demand will look like. All right, speaking of, because you are a wealth manager yourself and you brought it up. The idea that ETF formats, right, the wrappers for some of these crypto-type products, one of the big drivers of the crypto thesis, if you want to call it that, has been with the arrival of exchange-traded products that can track them. You also have an addressable market from, say, institutional or retail investment advisors, right, that they can then, quote-unquote allocate to some of those products. Not in a big way, but you know, some people say, hey, maybe if I allocate 1% or 3% or 5% or whatever it may be towards some of these products, it's not enough to debilitate me if they go to zero, hypothetically,

but at the same time, it's a way to capture some outsized alpha if I can hit on the right ones. Do you feel as though for some of these smaller ETF products that track some of these other smaller cryptocurrencies that we are starting to see more... RIAs and wealth managers quote unquote allocate to them beyond just say the iBit or ones that track Bitcoin? I think at the margins, the answer is yes, but I would actually bring up index-based crypto ETS here, which I'm extremely bullish on, right? So these are ETS that package up the various crypto assets, whether they're taking a market

cap weighted approach or using some other method. I think these are going to see substantial demand because I don't. don't think most traditional investors and certainly financial advisors want to be in the business of trying to pick winners and losers here. My sense is that they're going to be much more comfortable allocating across the category, especially given that crypto isn't emerging and highly speculative category. We talked about some of the correlations earlier. And so I think that index-based ETFs could be pretty big because it's a way for traditional financial advisors to say, you know what, I want some exposure to this space.

I see the long-term future of, say, tokenization and everything that goes along with Defi, but I don't wanna be in the business of trying to pick out the winners and losers. So I'm really bullish on index-based ETFs. And we'll also see actively managed crypto ETFs as well. I think there'll be a big audience for those as well. All right, crypto maybe just on the verge of getting

some more of that total addressable market for institutional money. Nate Geraci, thank you so much for the conversation. We appreciate it. Thank you. Always a pleasure. Thanks. All right. That does it for the ETF Edge podcast.

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