Research on leveraged ETFs has explained some important characteristics of these products:

  • their negative exposure to volatility
  • the resulting possible value erosion for long term buyers

However, the research also shows that the value erosion is not systematic. Shorting leveraged ETFs by pairs does not necessarily produce a positive return. In trending markets with low volatility, the power of compounded returns dominates the effect of value erosion (click on image to access calculator).