Leveraged ETFs track a multiple of DAILY returns
2x and 3x leveraged ETFs aim for 2x or 3x the underlying's daily return and reset every day. Over longer periods they differ from 2x or 3x the underlying's total return; that gap is volatility drag.
Example: just going up and down
If the underlying alternates +5% and −5% for 20 days it ends about −2.5%, nearly flat. A 2x ETF swings +10% and −10% and ends around −10% — worse than the simple multiple (about −5%). A 3x ETF loses even more.
How to use it
- Pick the multiple (2x, 3x, or inverse −1x to −3x).
- Choose the underlying path: alternating up/down, the same move every day, or your own daily returns.
- Add the annual expense ratio to include costs.
Reading it
On the chart, the gap by which the gold line (ETF) falls below the dashed line (simple multiple) is the drag. A persistent one-way trend can make the ETF beat the simple multiple instead (compounding).
Caveats
This is a simple model without premiums, tracking error or currency effects. Not investment advice; leveraged products can lose a lot.
FAQ
Why does a 3x ETF lose in a sideways market?
Because it resets daily and compounds. Repeated up-and-down moves of equal size leave you below where you started.
Is an inverse ETF the same?
Yes. It tracks a negative multiple daily, so over time it differs from −1x the underlying's total return.
How long can I hold one?
No rule, but the longer and choppier, the larger the drag. They often suit one-way trends only.
How is the expense ratio applied?
The annual fee is divided by 252 trading days and deducted daily in this simple model.