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if the stock market returns 10 per year and you own a triple leveraged etf tracking that stock market what return are you going to get most people would say 30 10 times 3 equals 30. however that is not actually the case this video is for educational purposes only it should not be considered investment legal or tax advice it is not an offer to buy or sell any security cash performance does not indicate future results investing is received the only way that's the case is if there is no volatility involved in all cases with a stock etf there is volatility involved that means the actual results you're going to get are not 30 but usually something less to understand why that's the case we need to do an illustration let's say we have an investment that we put 100 in at the start and every single day for 30 days it goes up one percent and then down one percent up one percent and down one percent if we repeat this pattern for thirty days we would have fifteen up one percent days and fifteen down 1 days intuitively you might think that 15 positives and 15 negatives should net out to zero percent however because of the mathematics of compounding that's not actually what we see one hundred dollars going down one percent goes to ninety nine dollars if we then go up one percent we get to 99.99 if you go down one percent from there you get 98.99 if you go up one percent from here you get 99.98 so if we repeat this for 30 days what you end up with at the end is actually 99.85 if we were to leverage this investment three times the volatility has an even worse result a hundred dollars going down three percent equals ninety seven dollars ninety seven going up three percent doesn't get back to a hundred dollars it only gets back to ninety nine dollars and ninety one cents three percent down from there is 96.91 and if we repeat this 30 times we end up with 98.66 if we make this even more extreme and assume plus ten percent minus ten percent days we actually end up with eighty six dollars and one cent the more volatile and investment the lower the actual compounded returns are going to be even in our example here when the average return was 0 the more volatile investments actually ended up going down that's why a leveraged investment is not going to generate the kind of returns that you would expect by whatever the leverage amount is to illustrate let's assume we have a market that goes up two days in a row by three percent per day and then on the third day it declines by five percent and it just repeats this for thirty days so our hundred dollar investment grows to a hundred and three dollars after the first day and then a little bit more than that hundred and six dollars and nine cents in the second day then it declines by five percent bringing us down to a hundred dollars and seventy nine cents then we go back up another two days taking us to 103.81 and 106.98 and we repeat that for 30 days we end up with 108 dollars and 14 cents which would be a return of 8.14 now let's say we had the opportunity to invest in this as a leveraged etf you would assume that the return for this should be 8.14 multiplied by 3 which would be 24.42 percent however the actual results are much different our one hundred dollar investment goes up to a hundred and nine dollars in the first day which is triple this return and the second day it goes up to 118 dollars and 81 cents the second day however the leveraged 5 loss drops us 15 taking us back down to 100.99 two days later we're back up to 119.98 and then back down to 101.99 at the end of 30 days this actually ends up being worth a little bit more than the unleveraged investment but it's only worth 110 dollars and 34 cents which is a return of 10.34 nowhere near the three times return we expect it to get and that is why a lot of these etfs if you look in the fine print they say that they are not for holding over any longer than a one trading day period and the reason is because of this compounded effect you end up getting the triple return on the first day just like we did here however as you introduce compounding into the picture the long-term returns end up being a lot different than what you might expect there are certain cases where the leveraged etf can generate long-term returns and those occur specifically when you have a long string of positive days with a lot fewer big down days tqqq is a good example of that the 10-year returns are 60.9 percent and that is an annualized return which is just ridiculous and here we have the qqq etf which has delivered percent so in tqqq's case the bull market the 10-year bull market really longer than that in qqq it's been such a good long string of positive returns that the leveraged etf has been able to almost not quite but almost deliver triple the results however if you get into an environment where returns for the underlying qqq aren't as friendly that or they are a lot more volatile then tqqq is not going to deliver as good of results as advertised by the triple leverage so you're basically taking triple the risk and not getting quite triple the results and how much less you get just depends on how volatile the period can be so just be aware of that before you invest in leveraged etfs covered call etfs like qild are another asset that are very widely misunderstood in this next video i'll explain how covered call etfs like qild work some of the risks and some of the reasons you might want to consider them for the portfolio and just a spoiler it has nothing to do with income in this video i'll explain why
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