Daily leveraged ETFs are constructed in such a way that they can 2x or 3x of the daily return of an index - but only for exactly one day. If you hold them for longer, it is not only "start to finish" that counts, but also the path in between (path dependency).
"Short gamma" - simply explained
"Gamma" can be thought of as "buy low / sell high". Daily leveraged ETFs often do the opposite due to their reset design:
- Market rises → the ETF has to buy more to get back to 2x/3x tomorrow (buys into strength).
- Market falls → the ETF has to sell to bring the risk back to 2x/3x (sells into weakness).
This "buy higher, sell lower" is colloquially known as short gamma (amplifies movements instead of dampening them).
Rebalancing logic (why volatility eats up returns)
Because the target is reset every day, rebalancing often takes place late in the day or towards the closing auction. This leads to this:
- Things can go well in clean trends.
- In sideways or zigzag markets, volatility can eat up performance ("volatility decay") because daily ups and downs interact unfavorably with the daily reset.
If you own one of these ETFs and you're not aware of this, you might want to rethink what you're doing. I don't mean panic selling.
$LQQ (-3.63%) , $3LSI (+22.52%) , $QQQ3 (-4.63%) , $3LGO (+21.22%) , $DBPG (-2.05%) , $3USL (-2.9%) , $LYY8 (-0.75%) , $3DEL (-1.14%) , $CL2 (-1.29%) , $3NGL (-28.29%)
