Gandulu

The Case Against Leveraged ETFs

I got carried away by your story and came up with a simple formula for annual rate of return of a leveraged fund over a long period of time:
P = L R - (L-1) C + f^2 (L-L^2)

L= Leverage
R= Annual performance of the underlying index in % (typically 10)
C= Annual cost of borrowing in % (typically 6 say)
f = measure of daily fluctuation in % (about 1)

So, for L=1X, P= 10%
for 2X, P = 12%
for 3X, P =12%
for 4X, P = 10%
for 5X, P = 6%, and downhill after that.

So, 2X leverage sounds OK and any higher than that would be disastrous. As you correctly observed, though, that the 2X fund would perform only marginally better than a good 1X fund. Have you come across any such analysis, perhaps in scholarly publication?