Glossary · Funds and derivatives
Leveraged ETF
A leveraged ETF is a fund that aims to give two or three times an index’s move each day, up and down, using borrowed money and derivatives.
Also called: 2x ETF, 3x ETF, leveraged fund, inverse ETF, daily leveraged ETF
From a peak, monthly reset. The index itself: −49%. A 3× model: −94%.
With dividends, Oct 2026. 2× model: $215,409; 3× model: $365,399.
In plain words
A normal ETF that follows the S&P 500 goes up 1% when the index goes up 1%. A leveraged ETF tries to go up 2% (a “2×” fund) or 3% (a “3×” fund) on that day, and down 2% or 3% when the index falls 1%. Inverse ETFs do the opposite: they rise when the index falls.
The key word is daily. The fund resets its bet every day. Over one day it does roughly what it says; over months and years its result can be very different from two or three times the index, better or worse.
Why? Because losses and gains do not cancel out. If an index falls 10% and then rises 10%, it ends 1% lower. A 2× fund falls 20% and then rises 20%, and ends 4% lower. The more the market zigzags, the more ground a leveraged fund loses.
Example
A choppy week
An index starts at 100 and moves +5%, −5%, +5%, −5% on four days.
- Index: 100 → 105 → 99.75 → 104.74 → 99.50: down 0.5%.
- 2× fund: 100 → 110 → 99 → 108.90 → 98.01: down 2.0%, four times the index’s loss.
- 3× fund: 100 → 115 → 97.75 → 112.41 → 95.55: down 4.5%.
Nothing happened to the index on balance, yet the leveraged funds lost money. This is called volatility decay.
One level deeper
To get 2× exposure with $100 of investors’ money, the fund holds about $200 of exposure through swaps or futures: it effectively borrows $100. After a rise it must add exposure; after a fall it must cut it, every day. That rebalancing is what makes the long-run result depend on the path, not just the start and end.
In a steady rise, daily reset can give more than twice the index’s gain; in a choppy or falling market, much less. From January 2000 to March 2013, when the S&P 500’s price ended close to where it started, the index with dividends returned +39%. Twice that would have been +77%; the 2× model returned −3%.
The first US leveraged ETFs appeared in 2006. Their fees are high (about 0.9% a year) and they also pay to borrow. US regulators warn that they are designed for holding periods of a day, for traders who watch them closely.
$10,000 in the S&P 500 at 1×, 2× and 3× since 2000
Since January 2000, $10,000 in the S&P 500 with dividends grew to $87,196. A 2× model grew to $215,409 and a 3× model to $365,399. The path was brutal: the 2× model fell 79% from its peak and the 3× model −94%, against −49% for the index.
The numbers behind the chart
| Date | 3× model | 2× model | S&P 500 (1×) |
|---|---|---|---|
| Jan 2000 | $10K | $10K | $10K |
| Dec 2000 | $7,270 | $8,290 | $9,436 |
| Dec 2010 | $2,648 | $5,970 | $10.6K |
| Dec 2020 | $60.5K | $57.6K | $38.5K |
| Dec 2022 | $67.5K | $64K | $42K |
| Dec 2023 | $106K | $88.4K | $51.1K |
| Dec 2024 | $204K | $140K | $66.4K |
| Dec 2025 | $272K | $174K | $76.7K |
| Oct 2026 | $365K | $215K | $87.2K |
Why it matters
Leveraged ETFs are popular with traders, and many people buy them as long-term holdings without knowing that they reset daily.
They show, in one product, how leverage works: it multiplies gains and losses, and a deep enough fall can wipe out almost everything.
Their daily trading can add to market moves near the close, when the funds rebalance.
A common mistake
Myth: A 2× ETF will give me twice the index’s return over a year.
In fact: Only over a single day. Over longer periods it can be more or less than twice, and in a choppy market it can lose money even when the index ends higher.
Questions people ask
Can a leveraged ETF go to zero?
A 3× fund loses everything if its index falls about 33% in one day, and a 2× fund if it falls 50%. That has never happened to the S&P 500 in a single day, but some leveraged and inverse funds on narrower markets have been wiped out and closed.
Why do leveraged ETFs lose value over time?
Daily rebalancing: after a loss the fund has less money to recover with, so zigzags eat into it (volatility decay). Fees of about 0.9% a year and the cost of borrowing add to it.
What is an inverse ETF?
A fund that aims to move the opposite way to an index each day: −1×, −2× or −3×. It suffers from the same daily reset, so holding it for long can lose money even if the index falls.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- 3-month Treasury bill, secondary market rate: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series TB3MS; retrieved from FRED, Federal Reserve Bank of St. Louis.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- The 2× and 3× lines are a model on monthly data, not real funds: each month they take 2× or 3× the S&P 500’s total return for the month, pay the 3-month Treasury bill rate on the borrowed part and a 0.91% yearly fee. Real leveraged ETFs reset every day, so their results differ: usually better in steady trends and worse in choppy markets.
- This page explains a term. It is not investment advice.