Over the past few years, financial firms have aggressively promoted increasingly complex exchange-traded products — from single-stock ETFs to inverse and leveraged funds — all promising the possibility of extraordinary returns for individual investors. Yet, as market volatility rises, the risks behind these products are becoming harder to ignore.

Mike Khouw, co-founder and chief strategist at Openinterest.Pro, cautions that these strategies can unravel quickly when markets retreat or move unpredictably. During an appearance on CNBC’s “ETF Edge,” he noted that leveraged ETFs often fail to keep pace with the assets they are meant to mirror, especially during turbulent periods.

According to Khouw, the appeal of leveraged products grows in long bull markets, when rising prices make amplified gains look effortless. But leverage cuts both ways. Many lightly leveraged ETFs rely on instruments such as total return swaps and options to achieve the boosted performance they advertise. To maintain the target leverage, portfolio managers must constantly adjust their positions — a process that becomes significantly more complicated in a volatile environment.

Khouw, whose firm specializes in options-driven analytics and research, also points out that the proliferation of short-dated options, now issued weekly or even daily, has dramatically increased the complexity of the market. This rapid pace makes it nearly impossible for most retail investors to manage these strategies effectively on their own.

There is a benefit, he said, in having professionally managed products that give individuals access to these sophisticated tools. It broadens access to strategies once reserved for more advanced traders. But the challenge is that many investors lack the necessary understanding of how options work or how these innovative products behave under stress. Their knowledge simply has not kept up with the speed of product development.

Nate Geraci, president of NovaDius Wealth Management, sees two main forces driving the surge in leveraged and inverse ETFs. The first is a shift in investor psychology. Many retail investors are increasingly drawn to funds that promise outsized, almost unrealistically high returns — even if they underestimate the potential downside.

The second is heightened competition within the ETF industry itself. Geraci describes what he calls an “arms race” among fund issuers, each trying to launch the next attention-grabbing product. This competitive pressure has accelerated innovation but also increased the risk that inexperienced investors could face significant losses.

As more complex ETFs flood the market, both experts emphasize a simple message: the pursuit of amplified gains comes with amplified risk. For investors eager to chase eye-catching returns, understanding how these products really work is no longer optional — it is essential.