The High-Octane Reality of Leveraged ETFs
Leveraged Exchange-Traded Funds (LETFs) are engineered for aggressive tactical strategies, not conventional buy-and-hold approaches. These funds use derivatives like futures contracts and swaps to amplify daily returns, typically targeting 2x or 3x the performance of an underlying index or asset.
The daily reset mechanism is critical—it ensures the fund maintains its leverage ratio but also introduces volatility decay. In choppy or sideways markets, this compounding effect can erode value even if the underlying asset trends upward over time. The gap between expected and actual performance widens with volatility.
Investors often misunderstand the single-day guarantee of returns. The 3x or 2x multiple applies only to that day’s movement, not extended periods. Empirical data shows how volatility drag systematically undermines long-term holdings in these products.
