Every time I talk about leveraged ETFs, someone tells me they decay. That’s not quite right. They don’t decay like an option does. What actually hurts them is leveraged ETF slippage, and it shows up on the way up and on the way down.
These funds reset every day. They use derivatives, options and futures contracts to deliver 2x or 3x the daily move of the underlying. Over one day, the math holds. Over weeks and months, those daily resets stack up, and the result drifts away from a clean 3x.
Leveraged ETF Slippage on a Big Move: GDX vs GDXU
On the big run in gold miners, GDXU went way past 3x the gain in GDX. When a move is that strong, the slippage stacks up in your favor. Then the pullback hit. GDX made a higher high, and GDXU made a lower high. GDX later worked back up to its prior high, while GDXU was nowhere near its own. That is leveraged ETF slippage, now working against you.
There is a floor to the math, too. A fund can’t fall more than 100%, so on a big drop the downside doesn’t track a clean 3x either. When these funds get too small, they do a reverse split. It’s just math.
Slow Movers Track Closer: XLF vs FAS
Financials don’t move that fast, and it shows in the chart. FAS, the 3x version of XLF, tracked close to 3x on both the pullback and the rally. The slower the underlying, the easier it is for the fund to keep up.
Tesla is the other side of that coin. Tesla stock is still up over the stretch I looked at. Holding TSLL over that same stretch left you no better off than where you started.
How to Manage Leveraged ETF Slippage
Leveraged ETFs can deliver amazing upside, but only in a really strong trend. In a messy chart, pullbacks are not your friend. These funds will whip around on you and slide on you in both directions.
That’s why you can’t just own them. Whether you trade short-term or you’re simply active, you need to manage these positions.
I covered how these funds are built, including inverse ETFs, in The Truth About 3x And Inverse ETFs Nobody Explains.
Watch the video below to see the charts and the math for yourself.
Your Profit Pilot,
TG Watkins
Allison Ostrander is going live Wednesday, October 14 at 6 PM CT to show how she trades earnings gaps with strict rules and a simple 1:1 risk setup. These trades take just minutes around the close and the next open. Reserve your free spot.
