ProShares Ultra MSCI EAFE (EFO)

The ProShares Ultra MSCI EAFE (EFO) is a leveraged exchange-traded fund that aims to deliver twice the daily return of the MSCI EAFE Index. If the index rises 1% in a day, EFO targets a 2% gain. If the index falls 1%, EFO targets a 2% loss. It achieves this through financial derivatives—swaps and futures contracts—rather than by buying and holding the underlying stocks.

How leverage actually works in an ETF

Most investors understand that buying a stock means owning a piece of the company. EFO does not work that way. Instead, ProShares uses financial engineering to amplify returns. The fund borrows money, buys swaps with major banks that pay it the return of the MSCI EAFE Index (multiplied by 2), and holds that position daily. It does not own Nokia or Nestle or Toyota. It owns a bet—a contractual derivative—that pays off if the index rises and loses money if the index falls, but at double the rate.

This mechanism matters because it creates path dependency. If the MSCI EAFE rises 10% over a year in a straight line, EFO will approximately double that to 20%. But if the index experiences volatility—it rises 5%, then falls 3%, then rises 8%—EFO’s return over the year will not be exactly double due to the daily reset. This is a subtle but real drag called volatility decay.

Here is a concrete example: suppose the index starts at 100. On day one it rises 10% to 110. EFO, targeting 2x, rises 20% to 120. On day two the index falls 10% (back to 99). EFO, targeting 2x, falls 20% (to 96). Now the index is only down 1% for the two days combined. But EFO is down 4%. That is volatility decay. The more the index whipsaws, the worse the drag becomes. Sideways, choppy markets are especially punishing for leveraged ETFs; steady directional markets are kind.

When EFO wins and loses

EFO is designed for a specific bet: the MSCI EAFE Index will rise, and you want twice the exposure. It is not designed for holding across years of volatile, sideways movement. It is designed for tactical positions—believing that international developed markets will rise over weeks or months, not decades—or for investors sophisticated enough to understand volatility decay and hedge its effects.

During strong bull markets, EFO shines. From March 2020 through late 2021, when international equities surged, EFO delivered roughly double the gains and attracted significant trading volume. But in choppy years—2022 saw broad equity declines with sharp rallies intra-year—EFO’s volatility decay became visible, and the fund underperformed a 2x multiple of actual index returns.

A related danger: EFO is not a hedge. If you own a position in international stocks and buy EFO as “insurance,” the insurance is backwards. Both positions lose money if the MSCI EAFE falls. EFO has the opposite relationship to broader markets than traditional hedges like bonds or protective puts.

Costs and the leverage trade-off

EFO’s expense ratio is around 0.95% annually, much higher than a plain-vanilla international developed-market ETF (which might be 0.1% to 0.3%). The difference is the cost of the swaps and the daily rebalancing needed to maintain 2x leverage. Those costs compound and reduce returns. In a flat market, EFO loses money purely from its fees and the bid-ask spread from daily rebalancing.

Trading the fund is straightforward—it trades on an exchange with decent volume. But the bid-ask spread is wider than a typical ETF because the fund’s value resets daily and market makers price that risk. This means transaction costs matter more when buying or selling EFO than when buying or selling SPY.

Daily reset and the multi-day math

EFO’s leverage targets are reset every single day. The fund calculates at end-of-day what it needs to hold (swaps, futures, or cash positions) to deliver 2x exposure to the index for the next day, and it adjusts. This daily rebalancing is invisible to most investors but is the mechanical engine of how leverage works. It also means that EFO’s returns over multi-day or multi-week periods can diverge from 2x the index’s actual performance, depending on volatility patterns.

The math is complicated, but the intuition is simple: leverage amplifies daily moves, and if those moves oscillate, amplified oscillations compound disadvantageously. Academic research on leveraged ETFs has shown that over long enough holding periods (months and years), most investors experience returns that are materially lower than 2x the underlying index, sometimes by 5%, 10%, or more, depending on how volatile the underlying market was.

Why someone would own EFO

EFO exists for traders and tactical investors, not for buy-and-hold investors. A trader might use EFO to express a medium-term bullish view on developed-market equities without deploying capital to individual stocks. A hedge-fund manager might use it as part of a broader portfolio with offsetting positions. An investor trying to amplify returns during a strong bull market might use it as a short-term satellite position.

None of these use cases involve holding EFO for years. Over a decade, EFO will almost certainly underperform 2x the actual index return due to volatility decay and fees. An investor holding EFO for a decade is fighting the fund’s mechanics.

Real risks and common mistakes

The most common mistake is buying and holding EFO expecting 2x index returns forever. That is not how leverage works in daily-reset funds. Over long periods, with typical market volatility, leveraged ETFs lose money relative to their leverage target.

The second mistake is misusing EFO as a portfolio hedge. It is not. It amplifies losses when the index falls. If your portfolio is heavily exposed to international developed markets and the index falls 20%, EFO would fall roughly 40%. That is a catastrophe for a hedging position.

The third mistake is underestimating volatility. Leverage amplifies volatility, and volatility amplifies leverage drag. EFO is roughly twice as volatile as the underlying index. That matters when you are trying to sleep at night.

Finally, many investors buy leveraged ETFs without understanding the daily reset mechanism and are shocked when multi-week performance does not equal 2x the index performance. It rarely does.

How to research and evaluate EFO

If you are considering EFO, understand first what the MSCI EAFE Index is and why you believe it will rise. Check the fund’s daily tracking—compare EFO’s 1-day returns to 2x the actual MSCI EAFE 1-day returns. If EFO is tracking well, the leverage is working as intended. Check the fund’s longer-period performance (3-month, 6-month, 1-year) against 2x the actual index returns. If there is a large gap, volatility decay is significant. (There usually is.)

Read ProShares’ educational materials on leveraged ETFs. They are explicit that these are not buy-and-hold vehicles. Think carefully about your time horizon. If you are holding EFO for more than a few months, you are almost certainly better served by simply buying the unlevered international developed-market ETF and deploying slightly more capital to achieve your desired risk level.

Finally, understand the currency exposure. EFO is exposed to the MSCI EAFE, which includes numerous currencies. Currency volatility will amplify alongside equity volatility, creating compounded drag. A sophisticated investor might hedge currency separately; a typical investor should just be aware this is happening.