See how a daily-reset leveraged ETF performs against its index over several days.
A leveraged ETF aims to deliver a multiple of its index's return for one day, then resets. Over more than one day the result depends on the path the index took, not just where it ended. Enter a sequence of daily index moves, or generate a choppy market, and compare the fund with the index and with the simple multiple many people expect.
| Day | Index move | Index value | Fund value |
|---|
Values start at 100. The fund's daily return is leverage × the index's daily return, minus one day's share of the annual charge; financing costs, tracking error and fund closures are not modelled. A move that would cost the fund 100% or more in a day sets its value to zero.
Why a 3x fund does not return 3 times the index
Because the fund resets its exposure every day, each day's gain or loss is applied to a different starting amount. If an index rises 10% and then falls 9.09%, it is back where it started. A 3x fund rises 30% to 130, then falls 27.27% to about 94.5: a loss of about 5.5% while the index is flat. The more the index swings, the larger this drag. In a steady trend the effect can work the other way, and the fund can beat the simple multiple.
Our guide to leveraged ETFs and daily returns works through more examples and the questions to ask before holding one for longer than a day.
Questions
What is volatility decay?
It is the loss a daily-reset leveraged fund suffers when its index moves up and down without going anywhere. The fund's losses on down days are taken from a bigger base after up days, and its gains after down days start from a smaller base, so the compounding works against it.
Can a leveraged ETF lose everything?
If the index moves far enough against the fund in one day, yes: a 3x fund loses its whole value if the index falls by a third in a day.