About the Leveraged ETF Decay Calculator
This leveraged ETF decay calculator estimates how a daily-reset leveraged or inverse ETF performs over a holding period compared with simply multiplying the index return. Choose the leverage (2x, 3x, −1x, −2x or −3x), enter the index’s total return over the period, its annualized volatility, the number of years and the fund’s expense ratio, and it returns the expected fund return, the naive “leverage × index” return and the gap between them — the volatility decay.
Leveraged ETFs reset their exposure every day, so they deliver their multiple of the index’s daily return, not of its return over weeks or months. In choppy markets that daily rebalancing buys high and sells low, and the loss compounds with the square of both leverage and volatility. Traders, long-term holders tempted by 3x funds and anyone comparing a leveraged ETF with margin borrowing can use it to see how much volatility costs.
The estimate uses the standard continuous-rebalancing approximation for a lognormal index, so the actual path of daily returns will make real results differ. It includes the expense ratio but not the fund’s swap financing costs or tracking error, which reduce returns further, particularly when interest rates are high.
With the default inputs, the expected leveraged etf return is 16.93%. Change any value above to recalculate instantly.
How to use the leveraged etf decay calculator
- 1Choose the fund’s leverage, e.g. 3x for TQQQ-style funds or −1x for a simple inverse fund.
- 2Enter the index return you expect over your holding period.
- 3Enter the index’s annualized volatility (historical or implied).
- 4Enter the holding period and the fund’s expense ratio.
- 5Compare the expected fund return with leverage × index and read the decay.
Formula and method
A fund that rebalances daily to L times the index’s daily return compounds those daily returns. If the index follows a lognormal path with annualized volatility σ, the fund’s value after T years is approximately the index growth factor raised to the power L, multiplied by a volatility drag term e^(−(L² − L)σ²T/2). For L = 1 the drag disappears; for 2x it is e^(−σ²T), for 3x e^(−3σ²T), and for inverse funds (L = −1) e^(−σ²T).
The decay figure compares this with the naive expectation L × R_index. The expense ratio is applied as (1 − ER) per year. The approximation is exact for continuous rebalancing and close for daily rebalancing; it ignores swap financing (roughly the cash rate on the borrowed exposure), tracking error and the path-specific effects of large single-day moves.
- L
- Daily leverage multiple (2, 3, −1, −2, −3)
- R_index
- Index total return over the holding period
- σ
- Annualized volatility of the index
- T
- Holding period in years
- ER
- Annual expense ratio
Worked examples
3x fund, index +10% with 20% volatility for a year
Cubing the 1.10 index growth gives 1.331. Volatility drag for 3x is e^(−(9 − 3) × 0.2² ÷ 2) = e^(−0.12) = 0.887, and the 0.95% fee leaves 1.331 × 0.887 × 0.9905 = 1.169. The fund returns about 16.9%, not 30% — 13.1 points of decay. If the index finished flat, the fund would be down about 12.2%.
2x fund over 3 years in a choppy market
Squaring the 1.15 index growth gives 1.3225, but 30% volatility for three years costs e^(−0.27) = 0.763, and fees take another 2.7%. The fund ends slightly down (−1.7%) even though the index gained 15% — it needs about a 16.0% index gain just to break even.
Inverse (−1x) fund when the index falls 10%
An inverse fund should gain 10% if the index drops 10%, but 1 ÷ 0.90 × e^(−0.0625) × 0.991 = 1.0344, so the expected gain is only about 3.4%. Volatility hurts inverse funds just as it hurts leveraged long funds.
Frequently asked questions
What is leveraged ETF decay?+
Leveraged ETF decay, also called volatility drag or beta slippage, is the tendency of daily-reset leveraged and inverse ETFs to return less than their stated multiple of the index over periods longer than a day. It comes from compounding daily returns: after a fall the fund has less capital, so equal-sized rebounds do not restore the loss.
How much does a 3x ETF lose to volatility?+
Approximately the drag factor e^(−3σ²T). With 20% annual volatility a 3x fund loses about 11% a year relative to the cubed index growth; at 30% volatility it is about 24%. The cost grows with the square of volatility, so turbulent markets are especially punishing.
Can a leveraged ETF beat its multiple?+
Yes. In a strong, low-volatility trend, compounding works in your favour and a 2x or 3x fund can return more than 2x or 3x the index over a long period. The drag only dominates when volatility is high relative to the trend.
Should I hold leveraged ETFs long term?+
Fund prospectuses and regulators such as the SEC and FINRA warn that leveraged and inverse ETFs are designed for short-term trading and may not suit buy-and-hold investors. Over longer periods results can differ greatly from the expected multiple, and large drawdowns are common.
What costs are not included here?+
Besides the expense ratio, leveraged funds pay financing costs on their swaps or futures — roughly the short-term interest rate on the extra exposure — and have trading costs and tracking error. For a leveraged long fund the financing drag is roughly (leverage − 1) × the short-term rate plus a swap spread, so a 3x fund pays on about twice its assets — several percentage points a year when cash rates are around 4%.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.