Definition
Leveraged ETFs aim to deliver 2x or 3x the daily return of an index using swaps and futures. Due to daily compounding, leveraged ETFs can deviate significantly from the expected multiple over longer periods—especially in volatile, range-bound markets. They are designed for short-term tactical trading, not long-term holding.
lightbulb Example
A 3x S&P 500 ETF aims to return 3% when the index rises 1% on a given day. But over a month of volatile trading (+2%, -2%, +2%, -2%...), the ETF can lose money even if the index is flat due to the mathematics of daily compounding.
Warning
Leveraged ETFs can lose money even when the underlying index is flat due to volatility drag from daily rebalancing. They are NOT suitable for long-term holding.
verified_user Key Points
- Delivers multiple of DAILY returns only
- Daily compounding causes long-term performance decay
- Designed for short-term trading, not buy-and-hold
- Inverse leveraged ETFs amplify downside moves