Leveraged ETF

A leveraged ETF is an exchange traded fund that uses derivatives, such as swaps and futures contracts, to try to deliver a multiple, commonly two or three times, of its underlying index's daily return. A leveraged ETF tracking a broad stock index at two times exposure is designed to rise about twice as much as the index on a day the index gains, and fall about twice as much on a day it declines.

Like inverse ETFs, leveraged ETFs are built to hit their stated multiple over a single trading day, and that daily reset means longer holding periods can produce returns that differ substantially from simply multiplying the index's return over the same stretch. In a market that moves up and down without a clear sustained trend, the effect of compounding daily returns can cause a leveraged ETF to lose value even if the underlying index ends up roughly flat over that period, an outcome that surprises investors who assume the multiple applies cleanly over any time frame.

Because of this compounding effect and the added cost of maintaining the derivatives exposure, leveraged ETFs are generally used by active traders looking to amplify a short-term view, not as long-term buy and hold investments. They also tend to carry meaningfully higher expense ratios than plain index ETFs, reflecting the more complex derivatives strategy needed to maintain the leveraged exposure day after day.