Entering text into the input field will update the search result below

VOO, SPY, QQQ And SOXX Vs Leveraged ETFs: May 2022 Decay Showdown

Warwick Langebrink profile picture
Warwick Langebrink


  • As expected, LETF Decay costs have continued to increase in March , April 2022.
  • LETF Decay costs now appear to have plateaued and in the absence of any further market shocks will probably stabilize in May 2022 and reduce beyond.
  • LETF leakage costs have increased in multiples since November 2021.
  • Unlike March 2020 (COVID crash), LETF Decay costs may not be overshadowed by the stratospheric April-June 2020 and subsequent bounce and bull run.
  • LETF decay costs will bite hard in sideways markets.

Futuristic Boxing Ring

allanswart/iStock via Getty Images

Key points carried forward from February 2022

  • Leveraged ETF decay costs have trebled in the last 5 months but now appear to have stabilized and plateaued
  • Leveraged ETF decay costs tend to be directional: in the

This article was written by

Warwick Langebrink profile picture
Chartered Accountant, CFA, Instrument rated pilot, mountain-biker (stage races), 30 years experience as a "quant" in Investment Banking: Specialized Finance and more recently hedge fund type boutique (Acacia) , fixed Income securities trading, product design, modeling, marketing to corporates, product implementation and execution.  Recently involved, assisted in the establishment of an offshore pension fund / retirement scheme in partnership with a niched international bank, including retirement scheme statutory and regulatory aspects, legal implementation, marketing, investment philosophy and strategy.  Financial areas of interest:  Arbitrage, ETF investing, Long/Short Equity, Bonds.   My area of writing interest is quantitative analysis, finding potential arbitrage opportunities, behavioral finance miss-pricings which are likely to lead to market corrections (sometimes requiring a contrarian investment style), macro economics, "exploring where no man has explored before" in quants, leveraged ETFs.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VOO, QQQ, SOXX, QLD, SSO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (28)

j2myers profile picture
There is an effort by FINRA
Limit acces to leveraged funds, please put your input in them.

j2myers profile picture
today (LEFT) was my friend, so at the last minute I added some SSG and TECS to protect my gains. I didint use SOXS and SQQQ due to wash sale rules from trades last week....
Warwick Langebrink profile picture
@j2myers ref my response on LT views on tinkering (my personal preference)
j2myers profile picture
TECL vs TQQQ? less liquid, less volatile. useable as swap?
Warwick Langebrink profile picture
@j2myers Tks for TECL "heads up," putting TECL on my radar:

TECL: "TECL 300% X IXTTR (where IXTTR = S&P Dow Jones Indices technology index which includes the following industries: computers and peripherals; software; diversified telecommunications services; communications equipment; semiconductors and semi-conductor equipment; internet software and services; IT services; electronic equipment, instruments and components; wireless telecommunication services; and office electronics.Sec Code: 25459W102. " Source : Direxion.

Please run chart comparison of IXTTR from 23 Apr 2021 to 28 Apr 2022: IXTTR was almost exactly flat over that period. Overlay (compare) the TECL chart over the same period. Observe 13.55% TECR degradation (decay)relative to IXTTR over that period. That 13.55% degredation (decay) actually isnt too bad relative to others under my analysis. Refer Fig / Chart 14 above for visual methodology for eyeballying degredation / decay without getting into inordinately complex math.

Re market timing , hedging, churining. Im a very boring "buy and hold until death, don't touch" kinda guy. I believe that my collective wisdom does not exceed the market's (as reflected in current prices), and that churning portfolio comes at various costs, lost bounce opportunities. Im not clever enough nor have the time to fiddle. I do however believe in the very long term direction of the market and stay 100% long through thick and thin, ride out the storm at 100% throttle. (actually 145% long): Ref Figure 13: 100-year returns on equities vs bonds vs T-Bills vs Inflation. seekingalpha.com/...

PS Does anyone have a good source for IXTTR type indices? YAhoo Finance and Google Finance and EXCEL 365 StockHistory function all returned " No data found for "IXTTR". I'm too Scottish to subscribe for full Bloomberg. Eventually found long term IXTTR data on Investing.com. Any other ideas for good inexpensive sources of ~5yr daily data?
04 May 2022
Leveraged etfs only "decay" in choppy markets. Steady draw-downs or steady gains are better for you vs same exposure (i.e 100k TQQQ vs 300K QQQ.) You can't put all your money in one because you need some to feed it after a massive draw-down. The compounding effect on the upside far outweighs and annual "decay." Just be careful.
Warwick Langebrink profile picture
@jdf1 In next article ill try explain (by my reckoning (which may be subject to debate)) how Investor should be indifferent between 100k TQQQ vs 300K QQQ before considering decay , financing costs. (No free lunches) After these costs , QQQ might be the better bet depending on your cost of capital. But there are Pros and Cons to each...
123Alpha profile picture
Let's see if these conclusions are correct --

* When the markets are in a downtrend, and th VXX is high, Leveraged ETFs [LEFT] are not your friend. The greater the multiplier (i.e., 3X vs 2X or 1X), the greater the loss in addition to the multiplier.

*As the VXX drops, the amount of leverage decay also drops. That's when the market Gods think things will go sideways or improve right now (May 4,' 22).

* Similiarly, when no one (realatively) wants the up-market indexes in a downtrend, your risk of losing decay value is small ( of course you lose your 1X, 2X, 3X multiplier because the market returns are going the other way).

*Conversely, when the market 'worm turns' the leverage is again your friend.

* In the current market with high volatility, one should consider borrowing money in taxable brokerage accounts (margin), since the cost of funding is often less than the decay costs of a LEFT. One could short the S&P 500 with SH and then buy more on margin (within limits of course) vs. buying a 1.5X or 2X or 3X LEFT.
Warwick Langebrink profile picture
@123Alpha 123A:“ When the markets are in a downtrend, and the VXX is high, Leveraged ETFs [LEFT] are not your friend. The greater the multiplier (i.e., 3X vs 2X or 1X), the greater the loss in addition to the multiplier.”. WL: Please refer Fig/Chart 11, and Figure 12 above and explanations. The greater the multiplier the LESS the loss (for the same S&P or Nasdaq exposure). In those cases LETFs lost less in downward markets even though they carry higher decay costs than the index (peculiarly, counter-intuitively). i’ll get into my thoughts, reasons and math next article.

123A: “* In the current market with high volatility, one should consider borrowing money in taxable brokerage accounts (margin), since the cost of funding is often less than the decay costs of a LEFT. ”. WL: Correct provided margining costs < LETF decay costs.

I’m not a fan of Short + Long strategy: This reduces yr net index exposure and there are costs incurred on both the Short And Long overlap legs at zero incremental index exposure. Rether simplify and just invest the net exposure long only? less costs for same exposure?
123Alpha profile picture
@Warwick Langebrink Thanks for the clarification. I look forward to your Chart 11 review about why the 3X index fell less during the strongest downturn for the QQQ.

Chart 12: I'm a little confused by your comment above. Doesn't Chart 12 say what one expects -- on a bigger down day, the more leverage, the greater the loss on the Long QQQs and their LEFTs.
Warwick Langebrink profile picture
@123Alpha Chart 12: on 29 April TQQQ dropped significantly less than its expected 3X multiple.
Doing well of late are leveraged TTT and TMV, which short the 20+ year Treasury.
Warwick Langebrink profile picture
@jazznut Tks for the "heads up". So you believe that 20yr rates will rise further? (and that these expectations aren't already built into the yield curve? (which YC has already kicked up considerably)). I don't have a view on whether the 20yr YC is fairly priced, has already taken into account likely future interest rate hikes. Will try crunch the LETF numbers when i have a mo. Im weary of 3X LETFs, particularly short LETFs and both TTT and TMV have low Net Assets < $500m, but the Treasury markets are highly liquid. Will be interesting to run the numbers. TKS.
@Warwick Langebrink Bought TTT a month or so ago as a hedge against rising rates-- will hold on for awhile longer as the Fed hikes rates.
Warwick Langebrink profile picture
@jazznut Good call a month ago (with 20:20 vision in hindsight). Also LETF costs really aren't that much of a factor for short holding periods (compared to the Turbo effect they provide).
j2myers profile picture
warwick - USD? or is SOXX much better?
Eponymous One profile picture
Decay slowdown...

That was quick!
Warwick Langebrink profile picture
@Eponymous One These decay spikes don't seem to last for too long (or havent done so historically). Maybe that has something to do with the underlying Equity Swap costs and Swap contract rollover. "Decay-Off" at the moment. i.e. move from 3X to 2X. Lets see what happens in a couple months time before switching back to 3X "Risk-On" again (but maintain previous total index exposure if possible). My 2 cents.
Eponymous One profile picture
@Warwick Langebrink

For me I'd rather stay in and hold maybe continue to add some incrementally on transient uncertainty rather than try to catch the right tailwind especially as we ease into the 2nd quarter and beyond within the 6 month window of memory in the runup to midterms
Wondering to offset decay could dollar cost averaging be of benefit?
Warwick Langebrink profile picture
@nrthrnvt DCA is a good strategy for investors with lower risk tolerance (and time and discipline to execute multiple orders). A disadvantage of dollar-cost averaging is that the market may / tends to go up over time. DCA will spread you risk of investing at the wrong time, but statistically there is no profit advantage to DCA. (no free lunches)
Great article!!! The larger decline in an index or a sideways declining market creates decay due to negative compounding of your losses over time, while in an increasing market it does the opposite due to compounding.
Warwick Langebrink profile picture
@JJ85 Correct. Kudos to you sir! Expanded analysis in next month's article.
GetRealHere profile picture
If you havent been in all cash the last 6 months, youre just bleeding money. Brokered CDs to the rescue.
Warwick Langebrink profile picture
@GetRealHere I am (perhaps controversially) not a believer in trying to time the market and as in March 2020, am remaining 100% long. I intend to ride out the storm (which might be around for quite some time) because I do not want to miss out on the next April-June 2020 type bounce. Perhaps this is wishful thinking, but in the very long term I am happy to ride the inflation / rising price wave. Contrary to current thinking i see stocks as a great long term inflation hedge and I don't like holding cash (poor inflation hedge, high systemic bankruptcy risk (Lehman risk), v low long term upside. The cash generating ability and machinery , factories of apple and Boeing remain intact despite changes in Fed monetary policy and tidal market sentiment. Ref Figure 13: 100-year returns on equities vs bonds vs T-Bills vs Inflation. seekingalpha.com/...
Impressive info!! Thnx
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

About SPY

SymbolLast Price% Chg
Expense Ratio
Div Frequency
Div Rate (TTM)
Yield (TTM)
Assets (AUM)
Compare to Peers

More on SPY

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.