Explainer
Leveraged ETF decay, explained
By AP's Morning Brief · Editor: AP Dult · October 26, 2026 · Fund documents checked Oct 26, 2026, 10:04–10:07 AM CST
A leveraged ETF such as ProShares UltraPro QQQ (TQQQ) aims for a multiple of an index's move for one day. Over longer periods, daily compounding means its return can be very different from that multiple of the index's return. Traders call the shortfall "decay" or "volatility drag".
What the fund says it does
"ProShares UltraPro QQQ® (the "Fund") seeks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the Nasdaq-100® Index (the "Index")."
"The Fund does not seek to achieve three times (3x) the daily performance of the Index (the "Daily Target") for any period other than a day."
Source: TQQQ Summary Prospectus, dated September 28, 2026.
Why daily compounding causes decay
Over several days, the index's return is the product of its daily returns: (1 + r₁) × (1 + r₂) × … − 1. A 3x daily fund's return is roughly (1 + 3r₁) × (1 + 3r₂) × … − 1, before fees, financing and tracking error. Because the fund's daily swings are bigger, losses take a larger bite out of what it has, and the gap grows when the index swings up and down.
A hypothetical two-day example (made-up numbers, not market data):
| Day | Index move | Index (start 100) | 3x daily move | Fund (start 100) |
|---|---|---|---|---|
| 1 | +10% | 110.00 | +30% | 130.00 |
| 2 | −10% | 99.00 | −30% | 91.00 |
| Total | −1.0% | −9.0%, not −3% | ||
Arithmetic: index 1.10 × 0.90 = 0.99; fund 1.30 × 0.70 = 0.91. Hypothetical, before fees and costs.
The prospectus says the same thing plainly: You may lose money when the return of the Index is flat (i.e., close to zero) and you may lose money when the Index rises.
In a steady trend with small daily moves, compounding can also work the other way and produce more than 3x. Which one happens depends on the path, which nobody knows in advance.
The risks the prospectus names
- Holding Period Risk:
The performance of the Fund for periods longer than a single day will likely differ from the Daily Target. This difference may be significant.
- Volatility:
The volatility of the Index has a negative impact on Fund returns.
- Leverage Risk:
If the Index approaches a 33% loss at any point in the day, you could lose your entire investment.
Also:The cost of obtaining this leverage will lower your returns.
What it costs
| Annual fund operating expenses | As stated |
|---|---|
| Management fees | 0.75% |
| Other expenses | 0.19% |
| Total before fee waivers and expense reimbursements | 0.94% |
| Fee waiver / reimbursement | −0.16% |
| Total after fee waivers and expense reimbursements | 0.78% |
Source: TQQQ Summary Prospectus (Sep 28, 2026); the advisory-fee waiver runs "through September 30, 2027". The ProShares fund page shows a gross expense ratio of 0.94% and a net expense ratio of 0.78%. The prospectus notes that the fund's transaction and financing costs "are not reflected in the table". Fund terms can change; check the current documents.
What this doesn't mean
Decay doesn't mean a leveraged fund must fall over time, and it isn't a forecast. It means the fund is built for a one-day target, and holding it longer adds a path-dependent result on top of the index's own risk. The prospectus is the authoritative source; read it before using any leveraged fund.