Learn the stock market › Short selling, warrants and leverage › Lesson 4 of 7
What is a leveraged ETF?
Daily leverage
A 2x leveraged ETF on an index rises 2% on a day the index rises 1% and falls 4% when the index falls 2%. A −2x inverse ETF does the opposite. That holds one day at a time, from the previous close.
Over several days, each day works on a new amount. Say the index goes from 100 to 110 and back to 100. The index is flat. The 2x fund first rises 20% to 120 and then falls 18.2% to 98.2, a loss of 1.8%. The −2x fund first falls 20% to 80 and then rises 18.2% to 94.5, a loss of 5.5%. Both lose on an index that went nowhere. The more the index swings back and forth, the bigger that drag.
The S&P 500 year by year
Each calendar year of the S&P 500, and what twice its daily move would have given over the whole year:
| Year | S&P 500 | Twice the index | 2x daily | −2x daily |
|---|---|---|---|---|
| 2016 | +9.5% | +19.1% | +17.9% | −20.8% |
| 2017 | +19.4% | +38.8% | +42.0% | −30.8% |
| 2018 | −6.2% | −12.5% | −14.6% | +4.3% |
| 2019 | +28.9% | +57.8% | +63.5% | −42.6% |
| 2020 | +16.3% | +32.5% | +19.5% | −48.2% |
| 2021 | +26.9% | +53.8% | +58.2% | −41.0% |
| 2022 | −19.4% | −38.9% | −38.8% | +29.4% |
| 2023 | +24.2% | +48.5% | +51.7% | −38.5% |
| 2024 | +23.3% | +46.6% | +49.6% | −37.3% |
| 2025 | +16.4% | +32.8% | +30.9% | −33.6% |
| 2026, so far | +7.8% | +15.5% | +14.2% | −18.0% |
The 2x daily fund gave less than twice the index in 5 of 11 years. The gap was largest in 2020: the index went +16.3%, twice that was +32.5%, but 2x daily gave +19.5%. In years with a steady rise, 2x daily can instead give more than twice the index.
The −2x fund lost in 9 of the years, more than the 2 years in which the index fell.
What can you lose?
A fund's shares cannot be worth less than zero, so a buyer loses at most what was paid. A day on which the index falls 50% wipes out a 2x fund. An ordinary ETF holds the index's stocks; a leveraged one uses derivatives and borrowing to reach its daily target.
Test yourself
The index rises 10% and then falls back to the same level. How does a 2x daily ETF do?
Sources
- US Securities and Exchange Commission, Updated Investor Bulletin: Leveraged and Inverse ETFs, August 29, 2023, read on November 6, 2026: leveraged and inverse ETFs aim for their objectives on a daily basis, and over periods longer than one day their performance can differ significantly from those objectives.