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Leveraged ETF

A fund using derivatives to deliver a multiple of an index's return for a single day, rebalanced every night, so its long-run return is not that multiple.

The objective is explicitly daily. Each evening the fund adjusts its exposure so it starts the next day at the stated leverage against the new asset base, which forces it to buy after up days and sell after down days. In a trend this compounding helps; in a choppy market it produces volatility-decay.

These are trading vehicles with a holding period measured in days. The fund is doing exactly what the prospectus says while losing money in a flat market, and no amount of being right about direction fixes a path that oscillates.

Example: a 3x fund on an index that falls 10% then rises 11.1% back to flat. The fund falls 30% to 70, then rises 33.3% to 93.3. The index is unchanged and the fund is down 6.7%.

Related: volatility-decay, inverse-etf, etf, leverage, volatility

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Margin and leverageA small deposit controlling a much larger position, and the point at which losses trigger a margin call.Position you controlnotional value $100,000your margin deposit: $5,000$100,000 / $5,000 = 20:1 leverageYour deposit absorbs every dollar of loss$5,000$2,500$0Equity leftMARGIN CALLequity has fallen to $2,5000%1%2%2.5%3%4%5%How far the price moves against you
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.

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