Leveraged ETFs: how daily reset and decay work
A leveraged ETF is a fund that aims to return a multiple, like 2x or 3x, of an index’s move for one day. If the S&P 500 rises 1% today, a 3x S&P 500 fund aims to rise about 3%. The target resets every day, so over weeks or months the fund’s return can be very different from 2x or 3x the index.
Key points#
- Leveraged ETFs use swaps and futures to multiply an index’s daily return.
- They reset each day. Over longer periods, returns drift away from the stated multiple.
- In choppy markets they tend to lose ground. In steady trends they can gain more than the multiple.
- You do not borrow, so you cannot lose more than you invest. But you can lose most of it.
- FINRA says they are usually unsuitable for retail investors who hold them longer than one trading day.
Risk note. These funds reset daily. Held for longer, their returns can differ a lot from the multiple in their name.
What is a leveraged ETF?#
A leveraged ETF is an exchange-traded fund built to deliver a multiple of an index’s return for a single day. A 2x fund aims for double the daily move. A 3x fund aims for triple (SEC investor bulletin).
An inverse ETF aims for the opposite of the daily move. A 2x inverse fund aims for double the opposite. If you are new to funds that trade on an exchange, start with what an ETF is.
Two real examples from ProShares: SSO aims for 2x the S&P 500’s daily return, and UPRO aims for 3x (ProShares).
How does a leveraged ETF work?#
A leveraged ETF uses contracts called swaps and futures to get more exposure than its cash. At the end of each day, it resets so that tomorrow’s exposure is again 2x or 3x its new size.
The daily reset explains most of how these funds behave. It is a type of leverage, but it lives inside the fund instead of in a loan in your account.
Why do leveraged ETFs lose value over time? A two-day example#
Leveraged ETFs can lose value in a market that goes nowhere. This is often called volatility decay. A two-day example shows how.
Say an index starts at $100. On day 1 it rises 10%. On day 2 it falls 10%. Each fund does exactly what it promises each day.
| Start | After day 1 | After day 2 | Two-day result | |
|---|---|---|---|---|
| Index (1x) | $100 | $110 (+10%) | $99 (minus 10%) | minus 1% |
| 2x fund | $100 | $120 (+20%) | $96 (minus 20%) | minus 4% |
| 3x fund | $100 | $130 (+30%) | $91 (minus 30%) | minus 9% |
The index lost 1%. The 2x fund lost 4%, four times as much. The 3x fund lost 9%. The bigger the multiple and the bigger the daily swings, the bigger this gap gets.
Now say the index rises 10% two days in a row instead.
| Start | After day 1 | After day 2 | Two-day result | |
|---|---|---|---|---|
| Index (1x) | $100 | $110 | $121 | +21% |
| 2x fund | $100 | $120 | $144 | +44% |
| 3x fund | $100 | $130 | $169 | +69% |
Here the 2x fund made more than double, and the 3x fund more than triple. So the daily reset helps in steady trends and hurts in choppy markets.
Real funds show the same thing. From December 1, 2008 to April 30, 2009, a US oil and gas index gained 2%. A fund aiming for 2x its daily return fell 6% over the same months, FINRA and the SEC report.
What do regulators say?#
Both the SEC and FINRA warn buy-and-hold investors. FINRA wrote about these funds in June 2009. It said daily-reset funds “typically are unsuitable for retail investors” who hold them longer than one trading session. It added that this is truest in volatile markets (FINRA Regulatory Notice 09-31).
The SEC’s bulletin adds that results over longer periods “can differ significantly” from the stated multiple. It also flags single-stock leveraged funds, which add the risk of one company to the leverage.
What do leveraged ETFs cost?#
Leveraged ETFs usually charge much more than plain index funds. As of October 16, 2026, ProShares lists a net expense ratio of 0.88% for UPRO and 0.84% for SSO (ProShares). An S&P 500 index ETF can charge as little as 0.03%. The fund also pays financing costs inside its swaps, which come out of returns.
Can a rule help? Two tested examples#
Some strategies hold a leveraged fund only when the market is calmer. One is the Leverage Rotation Strategy, from a 2016 paper by Michael Gayed and Charles Bilello. It holds a leveraged S&P 500 fund only while the S&P 500 is above its 200-day moving average. Otherwise it holds Treasury bills.
Tactfolio tracks two versions. These hypothetical backtests use real fund prices, dividends reinvested and a 0.05% cost per trade. Figures are as of September 25, 2026.
| 3x version, UPRO | 2x version, SSO | |
|---|---|---|
| Test starts | Mid-2009 | Mid-2007 |
| Yearly growth | About 25% (S&P 500: about 15%) | About 13% (S&P 500: about 11%) |
| Worst drawdown | About 52% | About 40% |
| A rough year | Lost about 40% in 2022 | Lost 28% from June to December 2007, while the market slipped 3% |
A drawdown is how far a portfolio falls from its last high point. Both versions grew faster than the S&P 500 in these tests. The 3x version also fell much further than the S&P 500 at its worst. The 2x version’s worst drop was smaller than the S&P 500’s but deeper than a 60/40 portfolio’s. The rule moves to Treasury bills when the trend turns down. It does not protect against fast drops or back-and-forth markets (Tactfolio, 3x, Tactfolio, 2x).
Common mistakes#
- Holding a 3x fund for a year and expecting 3x the index’s yearly return.
- Buying after a big run-up, when a single sharp drop hits at full leverage.
- Ignoring the expense ratio and hidden financing costs.
- Treating an inverse ETF as a long-term hedge. It resets daily too.
- Putting a large share of savings in one leveraged fund.
Try it on Tactfolio#
Tactfolio strategies can hold leveraged ETFs, long only, but they never borrow. Open either Leverage Rotation page to read the rules and see the full hypothetical backtest, including the worst years. You can copy a strategy to try a different average or swap the 3x fund for a 2x one. Then compare the results on the same dates.
Common questions#
How does a leveraged ETF work?#
It uses swaps and futures to get 2x or 3x exposure to an index for one day. At the close, it resets to that multiple again. Over many days, the results compound in a way that can differ a lot from the multiple.
Can you lose all your money in a leveraged ETF?#
You cannot lose more than you invest, because you do not borrow. But a 3x fund falls about 30% on a day the index falls 10%. A long slump or a few bad days can take most of the money.
How long can you hold a leveraged ETF?#
The funds are designed for one day. FINRA says they are usually unsuitable for retail investors who plan to hold them longer than one trading session. Anyone holding longer should watch closely and know the daily reset.
What is the difference between a leveraged ETF and margin?#
With margin trading, you borrow from your broker, pay interest and can face a margin call. With a leveraged ETF, the leverage is inside the fund. You cannot owe more than you put in, but the daily reset changes long-term returns.
Are 3x ETFs riskier than 2x ETFs?#
Yes. A 3x fund moves more each day and loses more in choppy markets. In Tactfolio’s simulated tests from 1960, the 3x Leverage Rotation version fell 72% at its worst, against 53% for the 2x version. Both figures are hypothetical, as of September 25, 2026.
Sources
- Updated Investor Bulletin: Leveraged and Inverse ETFs, Investor.gov (SEC), August 29, 2023, accessed October 16, 2026
- Regulatory Notice 09-31: Non-Traditional ETFs, FINRA, June 2009, accessed October 16, 2026
- UltraPro S&P500 (UPRO), ProShares, accessed October 16, 2026
- Ultra S&P500 (SSO), ProShares, accessed October 16, 2026
- Leverage Rotation Strategy, Tactfolio, figures as of September 25, 2026, accessed October 16, 2026
- Leverage Rotation Strategy 2x, Tactfolio, figures as of September 25, 2026, accessed October 16, 2026
- Leverage for the Long Run, Michael A. Gayed and Charles V. Bilello, 2016 Charles H. Dow Award paper, CMT Association, accessed October 16, 2026