Morningstar: A hypothetical basket of leveraged ETF reference stocks would have beaten the market

An equal-weighted hypothetical portfolio of the stocks that leveraged single-stock ETFs reference would have beaten the market over more than four years beginning in August 2022, according to a Morningstar analysis. The basket would have left virtually every active fund behind and trailed the leveraged ETFs themselves by only about 5 percentage points a year, Morningstar says, even though those funds used leverage throughout.

Morningstar says 25 of the initial 35 stocks would have been enough to push the portfolio past the market. That first batch included the Magnificent Seven — Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — along with a run of artificial-intelligence and chip-related names.

Timing helped too. The portfolio would have carried larger Coinbase weights from 2022 through 2024, while the stock was surging, and smaller ones going into a deep drawdown last year, Morningstar says.

Morningstar says the portfolio would have lost 41% of its value in its first five months as tech pulled back. It also would not have fared as well lately, according to the analysis.

Morningstar's framing is that the best stock-picker of recent years was the marketing department — specifically, whoever's job it was to know which stocks retail traders were most buzzed about at a given moment. The analysis describes a mechanism rather than a method: each new leveraged single-stock ETF launch added its reference stock to the basket, which is why the portfolio's composition tracks product launches and not a view about any company.

Two things bound the result. The basket is hypothetical; no fund tracked it, and its record is assembled after the fact from launch dates. And a reference stock's return is not the fund's return — the ETFs, which Morningstar says are meant to be held no longer than a day, used leverage throughout and still outran the basket by roughly 5 points a year.