Leveraged ETFs

About Leveraged ETFs

These are trading instruments, not investments, and the word doing the work in the prospectus is daily. A fund promising twice an index resets its exposure at the end of every session, so over any period longer than a day your return depends on the order the moves arrived in rather than just where the index finished.

The consequence is specific and worth understanding before buying one. A market that swings around and ends flat leaves a daily-reset fund below where it started, and the more it swung the worse the gap. Hold a three times fund through a choppy sideways stretch and you can lose money on an index that went nowhere. This is decay from resetting, not a fee and not a defect in any particular fund.

The exposure is usually built from swap agreements with a bank, so there is financing cost and counterparty risk sitting behind the ticker. Single-stock leveraged funds apply all of the above to something that moves much further to begin with. If you are holding one of these for weeks rather than days, you have almost certainly misunderstood what you own.

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