A leveraged ETF resets its exposure daily — compounding that daily reset over more than one day mathematically diverges from just multiplying the underlying’s total return by the leverage factor.
How it works
Compounding each day’s leveraged return separately gives the actual leveraged result; multiplying the leverage factor by the underlying’s simple cumulative return gives the naive expectation — the gap between the two is the decay.
What this does not include
This does not include expense ratios or borrowing costs, which further reduce a leveraged ETF’s real-world return beyond the pure compounding-decay effect shown here.
How to use this calculator
- Enter the leverage multiple and two days’ worth of underlying returns.
Frequently asked questions
Does decay only happen when the underlying is volatile?
Essentially yes — a smoothly trending underlying with little day-to-day reversal produces far less decay than a choppy, back-and-forth underlying, even over the same total cumulative move.
Are leveraged ETFs meant to be held long-term?
Most issuers explicitly market them as short-term trading tools precisely because of this decay effect, which compounds unpredictably the longer the holding period.
Does decay always work against the holder?
In a genuinely trending (low-reversal) market, daily compounding can actually work in the leveraged holder’s favor — decay specifically hurts in choppy, mean-reverting conditions.
