Leveraged ETF
IntermediateA leveraged ETF is an exchange-traded fund that aims to deliver a multiple, such as two or three times, of the daily return of an index, using derivatives and borrowing.
A 2x leveraged ETF aims to rise about 2% when its index rises 1% in a day, and fall about 2% when the index falls 1%. It achieves this by using derivatives such as futures and swaps, and by resetting its leverage daily.
The daily reset means that over periods longer than a day, returns can differ greatly from the stated multiple of the index’s return, especially in volatile markets. For example, if an index rises 10% one day and falls 10% the next, it ends down 1%. A 2x leveraged ETF would rise 20% and then fall 20%, ending down 4%, four times the index’s loss rather than twice.
This effect, often called volatility decay, means leveraged ETFs can lose value over time even if the index ends roughly where it started.
Leveraged ETFs are designed mainly for short-term trading. Holding them for long periods can produce unexpected results, and losses can be large. Regulators in several countries have warned retail investors about their risks, and some restrict their sale to retail clients.
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