Leveraged exchange traded funds have been unfairly blamed for the recent volatility in financial markets.
In fact, leveraged funds perform better in “trending” markets rather than volatile ones.
Markets that lurch back and forth can result in longer-term performance in leveraged ETFs that is less than the sum of the individual daily returns, their providers point out.
This results from daily resetting of the leverage and the nature of compounding returns. The phenomenon is known as “volatility drag,” Dow Jones reports.
When markets yo-yo, both bullish and bearish funds can lose value, regardless of where prices eventually end up.