most important point to understand is that leveraged ETFs are designed to achieve their leverage target on a daily basis, not for the long term. Misunderstanding this can lead to significant losses.

Let's say we have an index worth 100 points and a 3x leveraged ETF that also starts at a value of $100:

Day 1:

• The index rises by 10% (from 100 to 110 points)
• The leveraged ETF rises by 30% (from $100 to $130)

Day 2:

• The index falls by 10% (from 110 to 99 points, a 1% drop from its original value)
• The leveraged ETF falls by 30% (from $130 to $91, a 9% drop from its original value)

After just two days, the index fell by 1% from its original value, but the leveraged ETF fell by 9%! This phenomenon, known as "volatility decay" is a direct result of daily leverage.The higher the volatility of the underlying index, the greater the decay effect.

TQQQ (ProShares UltraPro QQQ) is one of the most popular leveraged ETFs. It tracks the Nasdaq-100 index with 3x leverage.

Since its launch in February 2010, TQQQ has shown impressive performance, with an average annual return of about 40% compared to about 16% for the non-leveragedQQQ. If you had invested $10,000 in TQQQ at its launch, the investment would have grown to approximately $1.5 million today.

But alongside the impressive returns, TQQQ has also experienced deep declines during crisis periods:

• 2018 (year-end): a drop of about 55%
• 2020 (COVID-19 crisis): a drop of about 70%
• 2022: a drop of about 85% from peak to trough

These declines illustrate the great risk involved in holding leveraged ETFs without an appropriate risk management strategy.

This chart demonstrates the dramatic difference in performance and volatility between regular indices (S&P 500 in blue, NASDAQ in purple) and their leveraged counterparts(TQQQ in green, SPXL in red) over a 15-year period. While leveraged ETFs show substantially higher returns during bull markets (TQQQ at +14,395%), they also experience much more severe drawdowns during market corrections. The 3x daily leverage amplifies both gains and losses, creating much steeper climbs but also much deeper valleys than their underlying indices. This visual comparison clearly illustrates why a simple buy-and-hold approach to leveraged ETFs can be extremely risky without proper risk management strategies.

One of the most common mistakes is assuming that the "Buy & Hold" strategy, which works well with regular indices, is also suitable for leveraged ETFs. The truth is that this isa very dangerous approach:

• Volatility decay over time causes a gradual erosion of the ETF's value
• Unbearable drawdowns of 80% or 90% are psychologically difficult for most investors
• Risk of almost total loss in prolonged bear markets
• Very long recovery times - decades in some cases, if at all

As we mentioned on page 8, simulations of TQQQ's performance during the dot-com bubble paint a concerning picture:While the Nasdaq 100 index fell by about 81%, the TQQQ simulation shows a fall of99.95% - an almost complete loss of value. An ETF that has lost 99.95% of its value needs to rise by about 200,000% to return to its original value - a change that is almost impossible. In fact, even after 25 years, such an ETF would not have recovered to its original price.

Instead of "Buy and Hold," more effective approaches to leveraged ETFs include:

• Short to medium-term investments
• Active risk management strategies like AlgozTrade's