In a world of rising markets, “leveraged” funds can sound like a fast track to wealth — but as with most things in investing, there’s no free lunch. For many Australians, particularly those managing their own superannuation (either through retail platforms or SMSFs), understanding what leverage means — and how it can impact long-term returns — is essential before deciding whether it belongs in your portfolio.
What is a leveraged fund?
A leveraged fund uses borrowed money or derivatives to increase its exposure to a particular market or asset class. For example, a 1.5x leveraged Australian equities fund aims to deliver one and a half times the daily return of the share market. If the market rises 2%, the fund might rise about 3%; if the market falls 2%, it could drop around 3%. Leverage magnifies both gains and losses — and that’s the key distinction. It can be a powerful tool when used appropriately, but a dangerous one when misunderstood.
Why leverage can appeal inside super
Superannuation is a long-term, tax-advantaged investment structure — and that long time horizon can make the use of limited leverage more palatable. For members in their 30s and 40s, a leveraged exposure to growth assets may enhance returns during extended bull markets, particularly when contributions are regular (helping to smooth out volatility over time), borrowing costs are embedded (with no margin calls at the member level), and super is invested for 20+ years (allowing short-term volatility to be absorbed). Used thoughtfully, leverage can help younger investors “tilt” towards higher long-term growth within a diversified super portfolio.
But the risks are real
Leverage is not a set-and-forget strategy. The same mechanism that boosts returns in good years can erode capital quickly during downturns. Key risks include volatility drag, where leveraged funds that reset daily can underperform over time when markets are choppy; sequence risk, where early losses can compound more severely in leveraged positions, particularly when withdrawals begin in retirement; and behavioural risk, where investors may sell at the worst time, locking in amplified losses. For retirees or those with shorter investment horizons, this volatility can be uncomfortable — and potentially damaging to long-term outcomes.
Where it might fit
A leveraged fund can make sense as a small satellite allocation — for example, using a portion of the portfolio to add growth potential while keeping the core invested in diversified, unleveraged assets. It’s not a replacement for sound asset allocation, risk management, or disciplined contribution strategies. For SMSF investors, it may also serve as an alternative to borrowing directly to purchase property or shares, offering leveraged exposure without the administrative burden of an LRBA.
The bottom line
Leverage can accelerate outcomes — in either direction. Whether it’s “right” for your super depends on your investment horizon and tolerance for volatility, your overall diversification and liquidity needs, and the structure and objectives of your super fund. When used prudently and reviewed regularly, leveraged exposure may have a place within a long-term growth strategy — but only as part of a well-constructed, risk-aware portfolio.
If you’d like to know more about how leveraged investments work inside super — and whether they could be suitable for you — contact our office. We can explain the options in more detail and help you determine if a leveraged fund aligns with your goals, time frame, and risk profile.
General Advice Warning
The information contained in this communication is of a general nature only and does not take into account your personal financial situation, needs, or objectives. You should consider whether the information is appropriate to your specific circumstances before acting on it. We recommend seeking advice from a qualified financial adviser before making any financial decisions. The information provided is based on current laws and regulations, which are subject to change. Please note that past performance is not indicative of future results.