Compounding can affect leveraged ETFs differently in varying market conditions. For example, in an upward-trending market, compounding can result in long-term returns that are greater than the sum of the individual daily returns, according to ProShares. In a downward-trending market, it can show long-term results that are less negative than the sum of individual daily returns. However, the long-term results are less than the sum of the individual daily returns in volatile market conditions when markets swings are a daily event. [Leveraged ETFs Gain Popularity in Trending Markets]
“Over periods longer than one day, a constant holding in leveraged bull and bear funds can both have negative compound returns because of the amplified volatility drag,” according to Morningstar analyst Michael Rawson. “Avoiding this volatility drag requires daily rebalancing.”
By resetting holdings on a monthly basis, SPLX may more closely track its 2x target during volatile market conditions over longer periods, providing investors more leeway in holding onto the leveraged product. However, the ETN may not fully benefit from the compounding effects during a trending bull market, as compared to leveraged ETFs that rebalance on a daily basis.
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Max Chen contributed to this article.