Beyond Leveraged ETFs: How to Gain Amplified Exposure to Market Indexes

If you're aiming to amplify returns on broad market indexes like the S&P 500 or Nasdaq, you're entering the world of derivatives – whether you realize it or not. The question is: what’s the most effective way to do it?

For most investors, the well-known product is leveraged ETFs. They offer 2× or 3× daily exposure with just a few clicks. But their structural design introduces some drawbacks and risks, making them primarily used as a short-term instrument.

In this article, we’ll explore some of the limitations of leveraged ETFs and introduce a lesser-known alternative – Quantitative Investment Strategies (QIS), created by leading investment banks like JP Morgan and UBS. Largely traded by institutional investors, these derivatives-based strategies are becoming more accessible to individual investors and can potentially offer more sophisticated, enhanced exposure to market indexes for investors with a suitable risk tolerance.

The usual suspect: Leveraged ETFs

Leveraged ETFs – for example, ProShares Ultra S&P500 (SSO), targeting 2× long exposure to the S&P 500 Index – use derivatives like swaps to amplify daily returns. While they deliver strong results in smooth, upward-trending markets, they can suffer disproportionately in volatile or sideways conditions.

The key issue with leveraged ETFs is “volatility decay”. Because they reset daily, compounding effects can lead to dramatic divergence from the expected return over time, particularly in volatile markets. As a result, even if the index ends flat over time, a 3× leveraged ETF might end the period with a noticeable loss. For this reason, leveraged ETF providers generally only recommend them for short-term holding.

Trading options yourself: Better in theory than practice

Can you engineer this type of exposure yourself using options? Technically yes – but practically, it’s a challenge. To replicate a leveraged ETF, you’d need to actively manage a book of puts and calls and roll positions daily.

And all of that effort typically results in worse pricing and worse outcomes than just buying the ETF. Retail click-traders often face punitive spreads and transaction costs, unfavorable tax treatment, and operational headaches. Without scale or automation, efficiency quickly breaks down.

A lesser-known alternative: Quantitative Investment Strategies

There’s another way to get leveraged exposure that many investors aren’t aware of. Banks and institutional desks have developed a category of strategies called Quantitative Investment Strategies (QIS). Some of these custom indexes are purpose-built to deliver specific outcomes, like amplified exposure to core benchmarks, with some added risk controls.

While QIS indexes aren’t generally available as off-the-shelf ETFs, they can be accessed through different wrappers such as structured notes, generally issued by the same bank. These vehicles can give qualified retail investors access to strategies otherwise reserved for hedge funds and institutional players trading via total return swaps and other structures off limits to retail investors.

What makes QIS different?

Unlike leveraged ETFs that provide fixed exposure, QIS indexes can apply rules-based, dynamic leverage rules. For example, when markets are calm, the index levers up. When volatility spikes – which typically happens during drawdowns – the index reduces exposure. This means the strategy could potentially capture more of the upside in good times while seeking to mitigate catastrophic losses in extreme markets.

Here’s a quick breakdown of how QIS compares to alternatives for leveraged index exposure:

Note: Not all QIS strategies seek amplified market exposure. Many strategies are structured around capital preservation, volatility control, or income.

Why haven’t I heard of QIS before?

QIS indexes are less well-known than ETFs partly because they’re distributed primarily through institutional channels, not retail platforms. In fact, many investors holding QIS-linked notes don’t even realize they’re using QIS – just that they’ve bought into a “custom index” or a note with enhanced performance terms.

But the QIS market is significant and growing quickly. Tens of billions of dollars are invested in QIS-linked strategies annually. Many life insurance and annuity products in the U.S. embed QIS under the hood. JP Morgan recently announced its QIS platform has reached $100 billion after growing by an average of 15% annually over the last four years (source: Investment International). These are not niche or experimental products – they are commonly used institutional strategies, just becoming more broadly available in a new wrapper.

What’s in it for the banks? Why do they offer these products?

Banks generate revenue on these custom indexes through structuring fees, index licensing, and hedging flows.

One common misconception with bank-issued products is that the bank is on the “other side of the trade”. In reality, banks aren’t in the business of taking directional market risk – they’re in the business of hedging it.

When banks commit to a payout linked to a QIS index, its rules-based nature reduces modeling uncertainty, and by extension, the bank’s own risk. With less downside to manage, banks are often able to offer more attractive terms to clients when packaged in vehicles like structured notes.

What are the tradeoffs and risks?

QIS indexes generally come with these key limitations:

• Complexity: QIS indexes can be opaque. The underlying methodology may be hard to parse, and full transparency isn’t always available due to IP concerns.

• Access: Custom QIS-linked notes often carry minimums of $250k or $500k, far more than ETFs. In some cases, they are only accessible to accredited investors.

• Liquidity: When packaged within a structured note, they are generally held to maturity, anywhere from 3 months to several years. Secondary liquidity may be limited.

It’s important to note that leveraged investing amplifies both gains and losses, and can lead to significant drawdowns. For the typical equity investor, regular (unlevered) exposure to broad market indexes offers a more appropriate risk-return profile.

The bottom line: More tools are available

If you're seeking amplified exposure to market indexes, you don't have to settle for the blunt tools of leveraged ETFs or the DIY headache of options trading. QIS indexes can offer a compelling third path for suitable investors.

Arta helps accredited investors access these sophisticated strategies with expert support and transparent pricing. If you’re ready to explore different types of enhanced index exposure, we’re happy to help you get started.