What is a leveraged ETF?
In one line: A leveraged ETF is a fund that aims to return a multiple, like 2x or 3x, of an index's move for one day, then resets.
A simple example
A normal ETF tracks an index. A 2x leveraged ETF aims to move twice as much as the index on a single day. If the index rises 1% today, the fund aims to rise about 2%.
The key words are "on a single day." The fund resets every day. Over many days that reset changes the math.
Here's an illustration. An index starts at 100. A 2x fund also starts at 100.
| Day | Index move | Index | 2x fund move | 2x fund |
|---|---|---|---|---|
| 1 | +10% | 110 | +20% | 120 |
| 2 | −10% | 99 | −20% | 96 |
After two days the index is down 1%. The 2x fund is down 4%, not 2%. A math example, not a promise.
Why it matters
In choppy markets that swing up and down, this drift adds up. It's often called "volatility decay." In a smooth trend the fund can do more than 2x. In a choppy one it can do much worse.
Leveraged ETFs also tend to charge higher fees than plain index funds. The fund's own documents say they're built for short holding periods.
Leverage works both ways. A 3x fund can drop about 30% on a day the index drops 10%.
A common mistake
Holding a leveraged ETF for months and expecting exactly 2x the index's return. The fund only targets 2x for one day. Over longer periods the result can be very different, as the table shows.
Size a leveraged ETF trade from your stop like any other trade. Its moves are bigger, so the same risk means fewer shares. The position size calculator does the math.
Questions
Can a leveraged ETF go to zero?
A one-day drop of 33% in the index would wipe out a 3x fund in theory. Funds and exchanges have safeguards, but big losses are very possible.
Are leveraged ETFs good for long-term holding?
Their own documents say they're designed for one-day goals. Over long periods, daily resets can make results drift far from the multiple.
What's the difference between a leveraged ETF and margin?
Margin borrows money in your account. A leveraged ETF builds the leverage inside the fund, so you can't lose more than you put in.
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