โWait, the index is upโฆ why is my leveraged ETF down?โ
This is one of the most common frustrations among new investors in leveraged ETFs.
Today, letโs break down why the market can go up, yet your leveraged ETF still loses money โ in a way that even beginners can easily understand.
๐ง What Is a Leveraged ETF?
A leveraged ETF aims to deliver 2x or 3x the daily return of an index.
- If the S&P 500 goes up +1%, a 2x leveraged ETF goes up +2%.
- If the S&P 500 falls โ1%, the ETF drops โ2%.
๐ The key here is โdaily returnsโ โ leveraged ETFs track multiples of daily movements, not long-term performance.
โ ๏ธ The Hidden Problem: Time and Volatility
Even if the market trends upward, a leveraged ETF can underperform โ or even lose money.
The culprits? Compounding and volatility drag.
๐ Simple Example
| Day | Index | % Change | 2x Leveraged ETF | % Change |
|---|---|---|---|---|
| 1 | 100 โ 105 | +5% | 100 โ 110 | +10% |
| 2 | 105 โ 99.75 | โ5% | 110 โ 99.0 | โ10% |
Results:
- The index ends at 99.75, just โ0.25% lower.
- The ETF ends at 99.0, a โ1% loss.
โก The index barely moved, but the ETF lost more.
Why? Because volatility compounds losses in leveraged products.
๐ The Volatility Trap
Leveraged ETFs reset daily.
That means returns are based on daily compounding, not the overall trend.
- If the market rises smoothly โ the ETF gains less than you expect.
- If the market is volatile โ the ETF can lose money, even in an uptrend.
๐งพ What Happens in the Long Run?
- Slow, steady uptrend โ leveraged ETF underperforms the index.
- Volatile market โ leveraged ETF can turn negative despite the index being positive.
- Long-term holding โ not suitable; these funds are designed for short-term trading.
โ Why Can ETFs Lose When Markets Rise?
| Reason | Explanation |
|---|---|
| Daily reset | Only matches daily returns, not cumulative growth |
| Volatility drag | Swings in price eat away at compounding |
| Compounding effect | 2x daily moves โ 2x long-term return |
| Long-term decay | Performance erodes over time |
๐ฌ Investor Tips
- โ Use leveraged ETFs only for short-term bets on market direction.
- โ For long-term investing, stick to regular ETFs like VOO (S&P 500 ETF) or QQQ (Nasdaq 100 ETF).
- โ Remember: if your chart shows gains but your ETF shows losses, itโs not your fault โ itโs the product structure.
๐ Leveraged ETFs look exciting, but without understanding compounding and volatility, investors can be caught off guard.
Stay smart, use them carefully, and always know what game youโre playing.
๐ Disclaimer
This article is intended for educational purposes only. It does not constitute financial, investment, or legal advice. All investment decisions involve risks, and readers should conduct their own research or consult with a licensed financial advisor.