/dəˈkāy/ – the state or process of rotting or decomposition.
Decay comes in many forms, ( I will spare you the images of tooth decay and other forms of decay). Generally speaking, it’s erosion. For 3X etfs, volatility can create this ‘decay’ very quickly. Whatever you like to call it, it is not beneficial. We like to call it the leverage effect, since it is magnified in leveraged vehicles. To break it down simply, if a stock falls 50% it will need to increase 200% to get back to even. If the underlying stock falls 50%, the leveraged ETF will need more than 200% due to compounding. As a side note, the individual daily percentage gains will determine how fast it gets back to break even. If it ever does.
This chart shows the consequences of choppy trade using an unleveraged stock and a 3X leveraged etf. The up and down volatility will make a loser out of everyone. Even if the unleveraged stock finally breaks out, the 3X version maybe be pulverized. That said, the best time to hold these products are in trending moves, either up or down, as most have bull and bear versions.
It’s up to you to determine which side to be on and when to get out, know the sector, understand potential daily movements, and don’t put too much at risk.
If we can get back to where we were at the close on Friday 3/13, using the 3X ETF we would still be underwater. This is very short term decay.