In One Sentence
When the market fluctuates up and down, a leveraged ETF's value erodes more than expected.
Volatility Decay by the Numbers
| Scenario | Underlying Index | 2x Leveraged | 3x Leveraged |
|---|---|---|---|
| +10% → -10% | -1.0% | -4.0% | -9.0% |
| +5% → -5% repeated 10 times | -2.5% | -9.8% | -21.7% |
| +1% → -1% repeated 100 days | -1.0% | -4.0% | -8.9% |
The higher the multiple and the more repetitions, the exponentially greater the impact of volatility decay.
Why Does This Happen?
Leveraged ETFs track a multiple of the ‘daily’ return — not a multiple of the cumulative return.
Recovery from a decline requires a proportionally larger gain. This asymmetry is the core cause of volatility decay.
After -50%, to return to breakeven → +100% needed
2x leveraged at -100% → effectively 0 (recovery impossible)
Ready to See It in Action?
Verify the compounding effect of leveraged ETFs through simulation using real historical data. See for yourself how volatility decay impacts returns over time.