Leveraged ETF Decay Calculator (Volatility Drag)

How it works

Leveraged return ≈ (1 + R)^L × e^(−(L² − L)/2 × σ² × T) × (1 − fees)^T − 1; volatility drag per year ≈ (L² − L)/2 × σ²

A leveraged ETF delivers its multiple every day, then resets, so over longer periods it compounds — and compounding a volatile series costs money. If the index rises 10% then falls 9.1% it is back where it started, but a 3× fund is up 30% then down 27.3%, ending 5% lower. The lognormal approximation shows the damage grows with the square of volatility and with (L² − L): a 3× fund on a 20% volatility index gives up roughly 12% a year to drag before fees, and financing the borrowed exposure costs several percent more at today’s rates. In a strong steady trend the same maths works in your favour, which is why these products can outperform their multiple in a smooth bull run and then be crushed in a sideways market. They are trading tools, not buy-and-hold investments.

Worked example

Index +10% over one year with 20% volatility: a 3× fund is expected to return about 16% after 1.5% of costs — versus the 30% a naive investor expects — with 11% lost to volatility drag; it needs the index to gain roughly 4.6% just to break even.

Frequently asked questions