Quick math before anything else. Monday a stock goes from $100 to $125. That's up 25%. Tuesday it drops back to $100. Down 20%. Two days later the stock is exactly where it started. Now run a 2x fund on that same stock. Monday it's up 50%, so $100 turns into $150. Tuesday it's down 40%, and $150 turns into $90. Stock: flat. 2x fund: down 10% 📉 (made up numbers, real arithmetic) Nothing broke there. The fund did exactly what it says on the label, because the 2x (or 3x) on a leveraged ETF is a promise about one single day. It resets every night and starts over the next morning. Hold it for a month and what you get is a string of daily bets stacked on top of each other, which can land a long way from double the stock's month. What follows from that: Chop is what hurts. Up, down, up, down grinds the fund lower even when the stock ends up right back where it began. A clean trend does the reverse. Two 10% up days in a row is 21% for the stock and 44% for the 2x fund, a little better than double. The extra exposure comes from swaps and futures, and these funds can cost more to hold than a plain index ETF. Inverse ETFs are the same machine pointed down. They chase the opposite of one day's move and reset the same way. And they've gone single stock. There are 2x funds built on $NVDA and on $TSLA now, plus a 3x fund on the Nasdaq 100 (the index $QQQ tracks at plain 1x). The myth to drop: "the stock doubled this year, so the 2x fund must have quadrupled." Maybe more, maybe a lot less. It depends on the path the stock took to get there, and the SEC and FINRA have each published an investor warning about exactly that gap. Ever held one of these for longer than a few days? Did it land anywhere near what you expected? 👇 Educational, not financial advice. Just my read.
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3 Comments
Scott S@scottsinvesting · 19h
You clearly described what many don’t understand Akif… Well done!
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