Daily rebalancing of leveraged ETFs was wrongly blamed: volatility drag is the true culprit
Multiple recent studies overturn the old claim that leveraged ETFs underperform over time due to daily resets; the true drag on returns comes from the underlying assets' volatility, not the rebalancing frequency.
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Spender personas reflect household labor division, not personality
In discussions of "savers" and "spenders," Kelly flags a blind spot in this binary: who handles the household's day-to-day purchases. One partner may look like a big spender simply because they manage and decide on routine items—children's clothes, groceries, birthday gifts, school supplies. The other appears frugal partly because they have less discretionary spending. To judge whether two people are "financially compatible," you first need to separate essential household expenses from personal preferences, not just compare total spending.
— Kelly$10K to $1.3M: a misleading data point without context
Ben opens with a striking number: $10,000 invested in ProShares UltraPro S&P 500 (a 3x leveraged ETF) in 2009 is now worth $1.3 million—more than ten times what a plain S&P 500 ETF would be worth. But Dan immediately flags the caveat: 2009 was the bottom of the financial crisis. For the next 17 years, US equities trended upward, volatility stayed relatively mild, and interest rates hovered low. Only with all three conditions aligned did that number materialize. Switch the starting point and the outcome changes entirely.
— Ben/DanYoung people should borrow for stocks if income is stable
Samuelson and Merton argued in papers from 1969 and 1971 that young people's primary "asset" is human capital—their future earnings—which behaves like a stable bond, while their financial assets are small. This tilts their overall portfolio too heavily toward safety. Under a "constant target equity allocation" framework, they should borrow to buy stocks, treating that hidden human-capital bond as ballast. A follow-up paper in 1992 went further: the more flexible someone's labor supply (ability to work more hours to bridge income gaps), the stronger the case for leverage. Conversely, if income is highly correlated with equity markets, the model suggests zero leverage.
— BenHuman capital doesn't behave like a bond in recessions
This whole case for young people adding leverage rests on human capital behaving like a stable bond. But Ben questions that premise itself. Data shows young workers are more cyclically sensitive already, and Patrick Adams' research finds that high-income households' wages and business earnings often fall in tandem with equity markets. Worse, when income drops, people are often forced to sell depreciated stocks to cover cash needs—meaning leveraged investors could face a double blow at the worst moment, losing both income and portfolio value simultaneously.
— BenDaily rebalancing's harm depends entirely on actual return sequences
Ben concedes he was wrong in 2019: daily rebalancing doesn't inherently make leveraged ETFs underperform over time. The math hinges on a simple fact—if returns are random with no serial correlation, switching to weekly or monthly rebalancing makes "reset frequency" and "period variance" cancel each other out; no net difference. With positive serial correlation (trends that persist), more frequent rebalancing actually helps. Only with negative serial correlation does frequent rebalancing drag. In other words, whether daily resets hurt is an empirical question that depends on which return sequence actually occurs—you can't prejudge it.
— BenSwap contracts embed real counterparty risk in leveraged ETFs
Many leveraged ETFs gain their leverage through swap contracts with financial institutions, introducing counterparty risk that traditional stock holdings don't carry. A real case: the single-stock leveraged ETF LCDL had a clause in its swap contract that would terminate the agreement if the underlying asset fell by more than a certain amount in a single day. That clause was triggered, the fund went to zero, and it has since been liquidated. It's a reminder that leveraged ETF risk lies not just in the mathematics of volatility but in the structure of the contract itself—which can be fatal.
— BenSingle-stock leveraged ETF fees eat most of potential gains
Morningstar's data is stark: single-stock leveraged ETF investors are more likely to lose over 75% than to beat the stock they're tracking—19% of such products have fallen more than three-quarters since inception, while only 18% have beaten their underlying stock. One culprit is hidden costs: the stated fee is around 1%, but if the fund uses swaps to get leverage, financing costs don't show up in that figure. In practice, single-stock leveraged ETFs can carry a financing spread 10 percentage points above the risk-free rate, with total costs around 12%. Index-based 2x leveraged ETFs also exceed 5%.
— BenLeveraged ETFs were wrongly stigmatized, but remain risky
A 2026 working paper puts it bluntly: branding leveraged and inverse ETFs as value-destructive due to "volatility decay" is a stigma that likely causes long-term investors to miss a tool that could actually serve their goals. But the host adds a caveat: that doesn't mean everyone should use leverage. The real question is "Does my objective require higher returns, or would a plain balanced portfolio suffice?"—not "Higher returns are better, so what tool gets me there?"
— BenIn their own words · checked verbatim
One spouse may look like the spendthrift simply because there's the person doing most of the spending on behalf of the family.
Kelly3:04
$10,000 invested in the ProShares Ultra Pro S&P 500 3X leverage ETF when it launched back in 2009. $10,000 will be worth $1.3 million today. That is more than 10 times the dollar amount that you would have in a regular S&P 500 ETF.
Ben13:23
many high-income households, wage and business incomes do decline at the same time as the stock market.
Ben25:56
buying a leveraged fund and holding it for the long run is appropriate only for people who can spend the rest of their lives in a sensory deprivation tank.
Ben36:15
the swap contract had a provision for the contract closing if there was a certain downward move in a day that happened and the etf became worthless
Ben44:31
if you just take an example of an underlying asset with a daily volatility of five percent a 2x leverage gtf requires an annual return of nearly 100 percent just to match the performance of the unlevered asset
Ben49:47
single stock leverage etf investors have been more likely to lose over 75 percent of their investment than to outperform the underlying stock outright
Ben51:50
The demonization of leveraged and inverse equity ETFs, particularly the false accusation that these funds erode value via volatility decay, is a major disservice to investors that has likely discouraged long-term investors from using these products in ways that would help them achieve their financial goals.
Ben54:54
Figures
| 2x leveraged S&P 500 ETF drawdown in early COVID-19 | ~80% | 36:15 |
| Optimal leverage in Cederberg model (borrowing cost 1.4% above risk-free rate) | early 2x leverage; portfolio 34% domestic stocks / 66% international stocks | 33:11 |
| 2x leveraged index ETF average financing spread | ~0.5 percentage points above risk-free rate | 52:51 |
| 2x leveraged ETF total holding cost (current risk-free rates) | >5% per year | 53:52 |
| Single-stock leveraged ETF total holding cost | ~12% | 54:54 |
| Single-stock leveraged ETF performance (Morningstar) | 19% lost >75% since inception; only 18% beat underlying stock | 51:50 |
| 2x leveraged ETF break-even annualized return (5% daily volatility) | ~100% | 49:47 |
Glossary
- volatility drag
- The erosion of returns caused by high volatility diminishing the compounding effect and lowering annualized returns.
- break-even return
- The annualized return rate a leveraged strategy must achieve to match the performance of the unleveraged asset.
- swap contract
- A financial contract through which an ETF gains leveraged exposure by swapping with a counterparty, rather than directly holding assets.
- serial correlation
- The degree to which a period's returns are correlated with the next period's, determining whether more frequent rebalancing helps or hurts.
- non-recourse
- A loan structure where maximum loss is capped at the initial investment; the borrower cannot lose more than the principal.
- Merton-Samuelson share
- The optimal stock allocation ratio determined by expected equity risk premium, return variance, and risk aversion.
How to listen
Individual investors who hold or are considering leveraged ETFs for position sizing, financial planners conducting asset allocation research, and young investors trying to figure out whether leverage is right for them.
The first ~9 minutes of listener Q&A on marriage and finances—unrelated to the leveraged ETF topic—you can skip ahead to 9:19.