Can we have a “Leveraged ETF’s: explained” thread?

The value of the leveraged ETF degrades over time. I don't completely understand how the degradation works, but it makes holding leveraged ETF's a bad play. Get in and out quickly. I personally prefer options if we are going for leveraged or riskier money.

Why to not buy leveraged ETFs:

1. They are very expensive.

2. There is nothing you can buy to get 3xS&P500, so they use many complex strategies to attempt to achieve this. Most folks would think volatility is your friend, but when using option strategies and being forced to rebalance to match an index in some cases on a daily basis, volatility up or down usually creates much more losses than gains.

3. Leverage cuts both ways, but protecting on the downside could be argued is more valuable than outperformance on the updside. Why? If you lose 10% value, it will take about 11% gain to get back to even. A 25% loss needs a 33% gain, a 50% loss needs a 100% gain, and an 80% loss needs a 500% gain.

TLDR - Don't buy leveraged ETFs for the long term

Think about it like this. Assume you have a leveraged ETF that targets a 2x return on an index. Assume both the index and the ETF have a starting value of 100.

If the index goes down 10%, it’s value will be 90. Since the ETF is meant to return 2x the index, it will go down 20% to 80.

So far, we have no problem.

However, consider now the return needed to get back to breakeven for the index:

The index must increase 11.1% (100/90) to get back to 100.

Now look what happens to the 2x leveraged ETF:

If the index returned 11.1%, the ETF will have returned 22.2%, but 80 times 1.222 is only 97.8, as opposed to the full 100.

So even though the index is back to breakeven, you’re still 2.2% in the hole on your leveraged ETF. Wash and repeat many times and it becomes an asset that wastes away over time, particularly as volatility increases.

These leverage ETFs try to put a multiple on daily returns. Depending on the daily sequence of returns, even if the underlier is up, the leveraged fund can be down. This unpredictability makes them unattractive for the vast majority of investors- not only do you have to gauge whether something is going up or down (which is hard enough), but also the daily gyrations that lead to that conclusion (which may as well be impossible). That’s why most people who use these things for a real purpose other than “it’s worked out for me” are hedgers looking for a daily position.