Buy UPRO and Earn 3x S&P 500 Returns? You Might Be Overlooking a Crucial Detail!

Leveraged ETFs aim to deliver 2× or 3× the daily return of an index—not cumulative long-term returns. This distinction is critical. Compounding occurs from each day’s new starting point, not your original investment. So while you may get 3× the daily moves, you won’t get 3× the long-term returns.

Take ETFs like UPRO and SPXL (S&P 500), TQQQ (Nasdaq), UCO (Crude Oil), or TMF (Treasuries). Over time, they all face the same issue: volatility decay. Many investors mistakenly assume that 3× leverage means triple the total gain or loss. In reality, it triples the percentage change each day, which can lead to surprising long-term results.

For example, if the index gains 10%, then loses 10%, then gains 10% again, your total return is +2.9%. The 3× version delivers only about +5.8%, far short of a simple 3× multiplier. In this case, the 3× ETF behaves more like a 2× return—not what most expect.

Another important point is that losses hurt more than equivalent gains help. When the market goes up, the 3× percentage gain is applied to your starting value for that day. But when the market goes down, the 3× percentage loss is applied to the new, higher value after a gain. This means that for equal percentage moves, the dollar loss will be larger than the dollar gain.

Every leveraged ETF must rebalance daily in order to maintain its target—delivering 2× or 3× the current asset’s value. This daily rebalancing creates compounding effects that gradually cause the leveraged ETF’s performance to diverge from that of the underlying asset. In general, the higher the leverage and the more volatile the market, the greater this divergence will be over time.

Case Study: How UPRO Works

UPRO is designed to deliver 3× the daily return of the S&P 500 by using derivatives like swaps, futures, and other leveraged instruments. For example, if the S&P 500 goes up 10% in a day, UPRO should go up about 30%. Conversely, if the S&P 500 falls 10%, UPRO is expected to fall roughly 30%. The key is that UPRO resets its exposure every day—its returns compound from each new starting point rather than the original value of your investment.

Why UPRO Does Not Track 3× Returns Long-Term

Volatility will kill UPRO returns.

Suppose you invest $100 in the S&P 500. On day one, the market goes up 10%, and on day two, it drops 9.1%. After two days, you're back to about $100 — no gain, no loss. Now imagine you used UPRO, which targets 3× daily returns. Day one gives you a 30% gain, but day two hits you with a 27.3% loss — leaving you with only about $95. Even though the S&P 500 ends flat, UPRO loses money. That’s because compounding leveraged returns makes losses hurt more than gains help.

Furthermore, the order of returns matters due to what we call “path dependency.” In a smooth, steadily rising market, UPRO can perform as expected because each daily gain compounds on a stable foundation. However, in a volatile market where the price jumps up and down, UPRO ends up underperforming the expected 3× return by a significant margin. This concept is illustrated in the first graph, which shows five different scenarios. In two of these cases, UPRO nearly returns 3× the underlying S&P 500 performance, but in three cases, it performs worse than expected because of volatility and the order of daily returns.

In addition, consider the second graph, which plots the S&P 500 since the year 2000 alongside the corresponding market volatility (as seen in the VIX index in orange). This graph clearly demonstrates that periods of market downturn are typically accompanied by high volatility. Since these volatile periods are common—especially during recessions—the long-term performance of leveraged ETFs is further compromised by the negative effects of daily rebalancing and volatility drag.

In summary, while leveraged ETFs can be very effective in a trending market with low volatility, over the long term, their performance is often hampered by daily compounding effects and volatility drag. These factors make leveraged ETFs less attractive for long-term investments, especially for investors who cannot precisely predict market downturns.