A simple introduction

What Is a Leveraged ETF and How Does It Work?

A leveraged ETF tries to multiply the daily move of an index. For example, a 2× ETF aims for about twice the index move each day. That target is for one day, not for weeks or years.

Test an exampleSee supported funds

Reviewed August 21, 2026. Educational information, not personal financial advice.

Why the daily target matters

The fund sets its leverage again every trading day. This is called a daily reset. Because of it, the index start and end values are not enough. The order of the daily gains and losses also matters.

Index without leverage

100 → +10% → 110 → −10% → 99. Result after two days: −1%.

Daily 2× ETF

100 → +20% → 120 → −20% → 96. Result after two days: −4%.

The ETF reaches its target on both days. Over two days, it still loses 4%, not 2%. This dependence on the exact route is called path dependency. Frequent moves up and down can reduce the value. This is often called volatility drag. It is not a separate fee.

A steady trend can have the opposite effect and help returns. See the math in our daily compounding calculator.

How the fund creates leverage

Many leveraged ETFs use financial contracts such as swaps or futures. These contracts follow the value of an index without the fund buying every share with the full amount. This creates the leverage.

These contracts add risks. The other party to a contract may fail. Leverage also costs money because it needs financing. The fund prospectus explains the exact setup.

SEC guide to ETF structure, costs and risks

Which costs reduce the return

  • Fund fee: The yearly fee for running the fund.
  • Financing: The cost of creating the extra exposure.
  • Tracking difference: The fund may deliver slightly more or less than its target.
  • Trading: The buy and sell prices can differ. Broker fees and taxes may also apply.

The published fund fee therefore does not show every cost. Our cost guide explains each part.

The main risks

  • Larger daily losses: A 3× ETF also multiplies a bad day by about three.
  • Harder recovery: After a 50% loss, a 100% gain is needed to return to the starting value.
  • Path dependency: The result over several days depends on every daily move.
  • Tracking and costs: The real fund can fall behind the calculated daily target.
  • Large or total loss: A very large move in the wrong direction can wipe out almost all the investment.

Our total-loss risk guide explains the difference between a very large loss, a reverse split and a fund closure.

FINRA warns that daily-reset leveraged and inverse ETFs are usually not suitable for medium- or long-term investing. Holding them longer needs careful review and regular monitoring.

FINRA questions and answers about leveraged ETFs

Five questions before buying

  1. Which index and daily target does the fund use?
  2. How does the fund create its leverage?
  3. Which fund, financing and trading costs apply?
  4. How could large market moves affect my planned holding time?
  5. How much loss can I bear, and when will I review the position again?

Always read the current documents for the exact fund before buying. A backtest is only a model, not a prediction.

Next steps

Compare U.S. fundsSee daily 1×, 2× and 3× products for the S&P 500 and Nasdaq-100.Understand daily compoundingCalculate how gains and losses combine over several days.Understand every costSeparate the fund fee, financing, trading and the gap from the daily target.Compare ETFs and optionsUnderstand expiration, daily leverage, time value and maximum loss.Compare 2× and 3×See how more leverage increases losses and the gain needed to recover.