TGI tracks 13 sectors — the 11 standard GICS categories, plus two custom additions. Leveraged is one of them. Here's what it contains, why it exists separately, and what the tighter caps are designed to protect against.
The GICS framework — the 11-sector system published by S&P and MSCI — organizes stocks by what a business actually does. A semiconductor company belongs in Information Technology. A bank belongs in Financials. The system works well for operating companies, but breaks down for one specific class of investment vehicles: leveraged and inverse ETFs.
A fund that seeks 2x the daily return of the semiconductor index is not a semiconductor company. It does not design chips, build fabs, or sell silicon. It is a financial engineering product that references the semiconductor sector through derivative contracts. Classifying it inside Information Technology would consume sector capacity that rightfully belongs to actual IT companies in the portfolio.
The Leveraged sector exists to hold these funds as a distinct category with its own rules — separate from the sector they reference, separate from Financials, and separate from the Diversified sector used for broad market ETFs.
The rule of thumb: if a fund uses daily leverage multipliers (2x, 3x, or inverse variants) and achieves its exposure primarily through swap agreements or futures contracts rather than direct stock ownership, it belongs here — regardless of what sector its benchmark tracks. Structure determines the sector, not exposure.
It's a fair question. ProShares and Direxion are financial companies. By pure business-activity logic, a fund issued by a financial firm could sit alongside asset managers and brokers in the Financials sector.
The problem is purpose. The Financials sector in this portfolio exists to provide exposure to the business of financial services — banks, insurers, brokers. When you own Goldman Sachs or Brown & Brown, you are participating in the economic output of those companies. When you own a 2x semiconductor ETF, you are not getting financial services exposure — you are making a leveraged bet on semiconductor market performance, wrapped in a derivative structure.
Classifying a leveraged semiconductor fund in Financials would misstate both allocations simultaneously: it would overstate financial services exposure while hiding the actual leveraged semiconductor bet. Neither picture would be accurate. The Leveraged sector makes the bet visible and bounded on its own terms.
Most leveraged ETFs hold almost no shares of the companies they reference. The actual portfolio looks nothing like what the fund name implies.
The fund enters into swap agreements with major investment banks — UBS, Goldman Sachs, JPMorgan, Bank of America, and others. Each bank agrees to pay the fund the leveraged daily return of the target index. This is where the 2x or 3x exposure actually comes from. No stocks change hands.
To secure the swap agreements, the fund holds U.S. Treasury bills and money market instruments as collateral. This pile of fixed-income assets earns interest income at prevailing rates — and that interest income is the source of the quarterly distributions these funds pay. The dividends are real, but they track interest rates, not the dividends of the underlying index companies.
Some leveraged funds hold small positions in the actual index components. These are pledged as additional collateral against the swap positions, not as the fund's economic driver. In the case of ProShares Ultra Semiconductors (USD), the combined direct stock positions account for roughly 10–11% of fund assets. The swaps carry more than 150% of notional exposure.
Leveraged ETFs reset their exposure every single day. That daily rebalancing introduces a structural cost — often called volatility decay or beta slippage — that causes multi-period returns to diverge from the stated leverage multiple. In choppy or declining markets, the fund underperforms its multiplier. In strong trending markets with low volatility, it can actually outperform.
A simple two-day example shows how the math works:
The index lost 1%. The fund lost 4% — four times as much, not two. The daily reset means each day starts from a new base, and losses compound faster than gains recover them. The more volatile the market, the larger this drag becomes.
This same mechanism can work in the fund's favor during sustained bull markets. If the semiconductor sector trends strongly upward with low day-to-day volatility, upside compounding can push a 2x fund well above 2x the cumulative index gain. That is the dynamic behind the extraordinary long-term return figures these funds sometimes show — and why it's critical not to read those historical numbers as a simple doubling of a stable baseline.
The buy-and-hold question: TGI is a buy-and-hold methodology. Leveraged ETFs are engineered for short-term daily targets. That tension is real, and it's why the sector caps are tight. Long holding periods in leveraged funds can produce exceptional returns in trending markets — or significant underperformance in volatile ones. The caps keep any single outcome from defining the portfolio.
Leveraged funds will frequently appear near the very top of the TGI watchlist rankings — sometimes at rank 1 or 2 out of 900+ stocks. This is not a signal to overweight them. It is a feature of how the ranking formula interacts with amplified historical price data.
The TGI score combines dividend growth, price growth across four timeframes, and payout ratio. When a fund has delivered 11,000% price growth over ten years — as a 2x semiconductor ETF can show in a long bull market — that dominates every price-related component of the formula. The ranking is technically accurate: the fund did grow faster than almost everything else on the list. But the formula has no way to account for the path-dependent leverage risk embedded in those returns, or the fact that a sharp downturn can reverse years of gains quickly.
A top TGI rank on a leveraged fund reflects amplified historical price behavior. It is not equivalent to a top rank on a dividend-growing operating company. The sector cap structure is the mechanism that keeps this distinction enforced — not judgment applied one fund at a time.
The Leveraged sector operates under stricter limits than any standard GICS sector. These are not arbitrary — they reflect the asymmetric risk profile of instruments that can compress years of gains in a short downturn.
| Rule | Leveraged sector | Standard sectors |
|---|---|---|
| Sector cap (new purchases) | 5% of portfolio | 10% of portfolio |
| Per-position cap (new purchases) | 1% of portfolio | 5% of portfolio |
| Counts against underlying sector? | No | N/A |
| Cap applies to organic growth? | No — only new purchases | No — only new purchases |
The last two rows matter. A leveraged semiconductor ETF held in this portfolio does not consume any of the Information Technology sector's 10% allocation — it sits entirely within the 5% Leveraged bucket. And as with every sector rule in TGI, the caps govern new purchases only. If a leveraged position grows well beyond 1% of the portfolio through price appreciation, that's a win — it doesn't trigger a sale or a rebalance. New capital simply gets redirected until the rest of the portfolio catches up.
These are the leveraged and inverse funds currently on the TGI watchlist or held in the portfolio. All are tracked separately from their underlying sectors. Scores for each are available in the AppSheet search tool.
The Leveraged and Diversified sectors sit alongside the 11 standard GICS categories in the TGI methodology. The How It Works page covers the full framework.