Volatility Drag & Leveraged ETF Decay
Shows why a daily-rebalanced leveraged fund earns less than leverage × the index return. The gap is volatility drag: compounding turns an arithmetic return μ into a geometric return of roughly μ − σ²/2, and leverage multiplies σ, so the penalty grows with the square of the leverage — before expense ratios and borrowing costs are even counted. The calculator combines the closed-form approximation with a Monte Carlo simulation of daily rebalancing (252 steps per year), and reports the median outcomes, the percentile spread and the probability that the leveraged fund ends below the plain index over your horizon.
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Results
Notes
- Daily rebalancing makes leveraged funds path-dependent: a sideways, choppy market grinds them down even when the index finishes flat.
- The σ²L²/2 term is the whole story in miniature — double the leverage and the drag quadruples.
- Leverage wins in strong, low-volatility trends and loses in volatile sideways markets; it is a bet on the path, not just the destination.
- Leveraged ETFs are designed to deliver the multiple daily, not over months or years — their prospectuses say exactly this.
- This is an educational estimate, not financial advice; talk to a qualified adviser before making money decisions.
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