weichangyang

Clear Proof Against Leveraged ETFs

Let's assume trading cost is zero and management fee is zero too. And let's assume we have two trading days, first day market is -20%, the second day market is +30%. We start with $100. In the plain fund, the return would be 100 * (1-0.2) * (1+0.3) = $104, so we make $4. In the leveraged fund, the return would be 100 * (1-0.4) * (1+0.6)= $96, so we lose $4. This should make it very clear that it is the negative compounding (you first hear it here, from me!) that kills the performance of leveraged fund. To exaggerate a bit, they cannot afford a single down day ;)

This also proves that high volatility kills one's portfolio.
This also explains why growth stock in the long run underperforms value stock.