A leveraged ETF aims to deliver a multiple — two or three times — of an index's return, and an inverse one aims for the opposite. The key word is daily: the fund rebalances every day to restore its multiple, a daily reset. So it tracks a multiple of each single day's move, not a multiple of the index's move over a month or a year.
That makes the result path-dependent: the route matters, not just the start and the end. When an index swings up and down and finishes where it started, a leveraged fund finishes lower, because each day's move is applied to a base that the previous day has already shrunk or stretched. That erosion is volatility decay. Over longer periods in a choppy market, a 2× fund can lose money while its index is flat or up, and an inverse fund can lose money while its index falls.
Same two days, same finish for the index. The leveraged fund lost four times as much.
Educational content only. It is not personal financial advice.