Glossary
Leveraged ETF
A fund built to deliver a multiple of an index's move over a single day and then reset, which is not a multiple over a year.
A 3x fund aims to return three times what its index does today, and tomorrow it starts again from the new level. The daily reset is the entire design, and the fund's own prospectus states it plainly, which is worth knowing because the name on the ticker does not carry it.
Over more than one day the arithmetic stops being three times anything. Each day compounds on the previous day's result, so a stretch of up and down moves leaves the fund below three times the index's move over the whole period, and the gap widens the more the index zigzags rather than travels in a straight line. The industry calls that volatility decay.
The issuers describe these as products for short holding periods, and the course's ETF lesson treats them as a different animal rather than a stronger version of the fund next door. They also charge considerably more than a plain index fund, and that cost compounds against the holder in the same daily way.
Learn this properly
Lesson 2: Stocks vs. ETFs, in Plain EnglishWhat a fund actually is, why beginners keep hearing about index funds, and why leveraged ETFs are a different animal entirely.
Related terms
- ETF (Exchange-Traded Fund)A fund holding a basket of investments that trades on an exchange, bought and sold like a single share.
- Index FundA fund that mechanically holds whatever is in a published index, rather than having a manager choose holdings.
- VolatilityHow much a price moves around over a period, in either direction, measured as the size of the swings rather than the destination.
- Expense RatioThe annual percentage a fund charges to run itself, taken out of the fund's assets rather than billed to you.
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