A leveraged ETF is an ETF which seeks to deliver some multiple (frequently 2x) the daily performance of a benchmark index. However, over multiple days it will not return 2x the index. You should not buy and hold a leveraged ETF for any more than a couple of days at a time.
A leveraged ETF is an ETF which seeks to deliver some multiple (frequently 2x) the daily performance of a benchmark index. However, over multiple days it will not return 2x the index. You should not buy and hold a leveraged ETF for any more than a couple of days at a time.
Consider a trivial example, where an index is at 100 at the close of market Monday, rises to 200 on Tuesday, then returns to 100 on Wednesday. A leveraged ETF seeking to return two times the daily performance of that index will post 200% returns on Tuesday, and then -100% returns on Wednesday - and, by losing 100%, will effectively become worthless, though the underlying index's value was the same after two days.
A smaller version of this effect will gradually erode the returns of all daily-leveraged ETFs over time - even before considering the (typically higher than normal) expense ratios. The SEC provides several examples of this in its document, Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors:
Between December 1, 2008, and April 30, 2009, a particular index gained 2 percent. However, a leveraged ETF seeking to deliver twice that index's daily return fell by 6 percent—and an inverse ETF seeking to deliver twice the inverse of the index's daily return fell by 25 percent. During that same period, an ETF seeking to deliver three times the daily return of a different index fell 53 percent, while the underlying index actually gained around 8 percent. An ETF seeking to deliver three times the inverse of the index's daily return declined by 90 percent over the same period.
Read the prospectus or weep.
