💭 When you hear “3x leverage,” do you think it’s a product that makes a 30% profit if the underlying asset goes up by 10%?
I also think that way when I hear “3x.” For example, if Bitcoin goes from 100 to 110, that’s a +10% gain. At 3x, that would be +30%, reaching 130. If you only look at a single day, it’s a fairly straightforward story.
However, when looking at leveraged ETFs, what matters is “3x relative to what?” Many leveraged ETFs do not target long-term price movements, but rather 2x or 3x the daily price movement. The SEC and FINRA also warn that these products generally have daily targets and can deviate significantly from a simple multiple of the underlying index over periods longer than one day.
▶ Source: SEC | Leveraged and Inverse ETFs
In other words, you cannot simply assume that “because the underlying asset rose 20% in one year, the 3x ETF will rise 60%.”
In this article, I will organize the points you should know when looking at 3x leveraged ETFs into four categories: 📅 Daily Reset, ♻️ Compounding, ↔️ Sideways Movement, and 🌊 Volatility.
① 📅 Daily Reset | “3x” is reset every day
First and most importantly, there is the daily reset.
When a 3x leveraged ETF targets “3x the daily price movement,” that 3x is recalculated every day.
For example, suppose the underlying asset rises 10% in one day from 100.
Underlying asset: 100 → 110 (+10%)
For a 3x product, to simplify:
3x product: 100 → 130 (+30%)
That is it.
Up to this point, it matches the “3x” image.
However, suppose the underlying asset falls 10% the next day.
110 × 0.9 = 99
The underlying asset went from 100 to 99 over two days. That is a decline of about 1%.
On the other hand, if we simplify the 3x product to move -30% against the next day’s -10%:
130 × 0.7 = 91
This is the result.
In other words,
Original asset: 100 → 99
3x product: 100 → 91
is the result.
It feels like it should return to the original value because it is “+10% followed by -10%,” but the percentage is applied to the price at that specific moment each time.
This is the first point where it does not simply become “original price movement × 3” over multiple days.
② ♻️ Compounding | It’s not just the “final price” you should look at
What creates this difference is the compounding effect where daily returns accumulate.
With leveraged ETFs, the next day’s price movement is applied to the asset value that reflects the current day’s results. Therefore, for periods longer than one day, not only the final price but also the path of daily price movements leading up to it affects the result.
For example, even if an asset reaches the same +10% after a few weeks,
📈 If it rises gradually to +10%
and,
📈 Rises significantly
📉 Falls significantly
📈 Rises again
if it reaches +10% by repeating these, the results of a leveraged ETF will not necessarily be the same.
The SEC and FINRA also explain that due to daily resets and compounding, the longer the period, the more it deviates from a simple multiple of the original index, and this impact can be greater in markets with volatile price movements.
💡 In short, with leveraged ETFs, not only “how much did it rise in the end?” but also “how did it move during that time?” is also important.
③ ↔️ Sideways | Even if the original price returns, the ETF may not
What is particularly surprising for beginners is that even if the original asset returns to the starting point, the leveraged ETF may not return to its original value.
For example, if the original asset moves as follows:
100
→ 110 at +10%
→ 100 at approx. -9.09%
it will eventually return to the original 100.
However, if we simplify a 3x product,
100
→ +30% becomes 130
→ approximately -27.27% becomes about 94.5
is the result.
Even though the original asset returned to 100, the 3x product is at about 94.5.
🤔 Do you think, ‘If the original asset ends up at the same price, the 3x ETF will also return to its original price’?
That is not necessarily the case.
In a market that repeatedly rises and falls, the effects of daily resets and compounding can cause the results of leveraged products to deviate from a simple ‘3x’.
However, it is also not accurate to simply remember that ‘if it moves sideways, it will definitely go down.’ Actual results vary depending on daily price movements, costs, and other factors. The important thing is to understand that long-term price movements are not determined by the original asset’s rate of return × 3.
④ 🌊 Volatility | The more intense the price movement, the easier it is for the gap to widen
The last point is volatility = the magnitude of price movement.
Even if the final result is an increase in both cases, the results of a leveraged ETF can be significantly different between a market that rises little by little every day and a market that repeatedly experiences large rises and falls.
The more intense the price movement, the more the effects of daily resets and compounding tend to accumulate. FINRA also states that such deviations can become larger in high-volatility markets.
▶ Source: [ FINRA | Non-Traditional ETFs FAQ ]
However, ‘leveraged ETFs do not necessarily decrease if held for a long time.’
In a market where a one-way upward trend continues, the compounding effect works positively, and the return over a certain period may exceed a simple 3x of the original asset.
In other words, the problem is not
leverage = dangerous, so you shouldn’t use it
a simple story like that.
What is important is not to think of a ‘daily 3x product’ as a ‘long-term 3x product’.
👀 4 checks for looking at 3x leveraged ETFs
When I see products like ‘2x ETFs’ or ‘3x ETFs,’ I think it is easy to understand by checking the following four points.
-
📅 3x relative to what?
Is it the daily price movement, or another period? -
♻️ Is it reset daily?
If it is a daily reset, it is not necessarily 3x the long-term rate of return. -
↔️ What happens in sideways or oscillating markets?
Even if the original asset returns to its starting point, the leveraged product may not necessarily return to the same level. -
🌊 How intense is the price movement?
The higher the volatility, the more the daily compounding effect tends to significantly impact the results.
Furthermore, for actual products, trust fees, derivative costs such as futures and swaps, financing costs, and tracking errors also affect the results. Many leveraged ETFs use futures, swaps, etc., to achieve their target multiples, and the mechanisms differ for each product.
Therefore, rather than just looking at the ‘3x’ in the product name, you should also check what the target is, what period it aims to be 3x of, and what it uses to achieve that.
🔎 Finally
💭 Previously, when I heard ‘3x leverage,’ I simply thought of it as a product where both profits and losses are tripled.
If it is just for one day, there are situations where that image is close. But when it spans multiple days, the story changes.
📅 It is reset daily.
♻️ Daily returns accumulate through compounding.
↔️ Even if the original asset returns, it may not return in the same way.
🌊 The more intense the price movement, the easier it is to deviate from a simple 3x.
Therefore, before thinking ‘Does it earn 3x?’, check ‘3x of what, and for what period?’
This is the basic yardstick for looking at leveraged ETFs.
‘If BTC goes up 20%, a 3x ETF should go up 60%.’
When you want to think that simply, daily reset please try to remember that term.
Even with the same ‘3x’, the meaning is different between one day and one year.
📚 For those who want to know a little more deeply
In this ‘Permanent Edition Explanation’, we dig one step deeper into themes that caught our attention in daily news, focusing on crypto assets and Web3.
If you want to continue reading articles close to this theme, click here.
▶ ₿ Reading Bitcoin, ETH, and the Market | Permanent Edition Index
We have organized themes such as the differences between BTC and ETH, the background of price fluctuations, ETFs, corporate holdings, and crypto-related stocks, which are market movements that are difficult to see just by ‘going up or down’.
If you would like to find other archived themes, click here.
For those who want to learn the basics of crypto assets and Web3 from the ground up, we have prepared a beginner’s course.
▶ 🔰 Crypto Asset & Web3 Beginner Course | Episode 0: Series Article List [Archived]
If you want to read more deeply into the same theme, go to the thematic index.
If you want to see other fields, go to the archive top.
If you want to learn from the basics in order, go to the beginner’s course.
Please feel free to read from the sections that interest you, depending on your goals.