Leveraged & Inverse ETFs

How 2× and 3× funds and inverse funds work, why they reset every day, and a real example of a leveraged fund losing money while its index went nearly nowhere.

Funds built for a single day

A leveraged ETF aims to deliver a multiple, such as 2× or 3×, of an index’s return for one day. An inverse ETF aims to deliver the opposite of the index’s daily return, so it rises when the index falls. Some combine both, such as −2× or −3×.

The key words are “for one day.” These funds use derivatives such as swaps and futures to hit their target each day, then reset. Over longer periods their results can differ a lot from simply multiplying the index’s return.

Unlock all of Investing School

The rest of this lesson, its chart examples and quiz are part of Investing School. Start free with Stock Market Fundamentals and the first lesson in every category.