Leveraged ETF Math

Before expecting 200% on market returns, do the math on leveraged ETFs.

That’s the message in today’s WSJ article ETF Math Lesson: Leverage Can Produce Unexpected Returns. Reporter Tom Lauricella points out that investors in leveraged ETFs should understand that the funds promise leverage on daily returns, not monthly, quarterly or annual returns.

The performance targets of these funds is reset daily, as a result investors who buy and hold are not likely to see the full 2x or 3x return on the benchmark index that they may have been expecting.

For example, Lauricella points out that the UltraShort S&P500 ProShares (SDS) rose 61% when the S&P 500 was down 38.5% in 2008.

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