Funds & wrappers
Leveraged ETF
A fund designed to deliver a multiple of an index’s return, reset every single day.
How it works
A 2× fund aims for twice the index’s daily move, and rebalances its leverage at the close so that the multiple applies to the next day too.
Because the multiple is daily, the compounded result over any longer period is not the multiple of the period’s return, and is usually worse.
Where it misleads people
These products are built for intraday and multi-day trading. Held for months in a volatile market they lose money almost mechanically, regardless of the index direction.
Worked example
An index falling 10% then rising 11.1% is back to flat. A 2× fund falls 20% to 80, then rises 22.2% to 97.8 — down 2.2% while the index is unchanged.
Related terms
- Volatility dragThe way volatility reduces compounded returns below the simple average of the yearly returns.
- LeverageUsing borrowed money to increase exposure beyond what your own capital would buy.
- ETFA fund whose shares trade on an exchange throughout the day like an ordinary share.
- CompoundingEarning returns on the returns you already earned, so growth accelerates the longer you leave it alone.
More in Funds & wrappers
- Mutual fund
- Investment trust
- Net asset value
- Index fund
- Performance fee
- Index
- Portfolio turnover
- High-water mark
All 25 Funds & wrappers terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.