Volatility drag
InvestingDefinition
The mathematical fact that volatile returns compound to a lower geometric mean than smooth returns with the same arithmetic average. Responsible for why levered ETFs decay over time.
3x daily-rebalanced ETFs (TQQQ, UPRO) lose roughly 1-3% per year to vol drag in normal markets, more in volatile ones. Their long-run CAGR is meaningfully below 3x the underlying index.
3x daily-rebalanced ETFs (TQQQ, UPRO) lose roughly 1-3% per year to vol drag in normal markets, more in volatile ones. Their long-run CAGR is meaningfully below 3x the underlying index.