A 2× fund promises twice the daily return — never twice the return over a month. Because it rebalances every close, volatility itself takes a cut. Run a path and watch a flat underlying still lose you money.
2.0×
3.0%
60
0%
UnderlyingLeveraged ETF (daily rebalance)What people expect (L × underlying)
Underlying
—
Buy and hold the stock
Leveraged ETF
—
What you actually get
Naive expectation
—
L × underlying — the number in your head
Volatility drag
—
Expectation minus reality
—
Why this happens. Rebalancing to a constant leverage every close forces the fund to
buy after up days and sell after down days — the exact opposite of what a patient holder does. Over time the expected drag is
approximately ½ · L · (L − 1) · σ² · T, so it scales with the square of volatility.
Doubling volatility quadruples the leak. This is why these products are documented as day-trading tools and why holding one
through a violent, directionless tape is a slow bleed even when your call on direction is correct.