Why Leveraged ETFs Like SOXL and SOXS Are Dangerous for Long-Term Investors

The Paradox of Leveraged ETFs: When Both Long and Short Lose Money

SOXL and SOXS are leveraged ETFs that track the Philadelphia Semiconductor Index. SOXL is a "3x long" ETF that aims to deliver three times the daily returns of the index, while SOXS is a "3x short" ETF designed to deliver three times the opposite daily movement. Theoretically, when one rises, the other should fall. So investors might assume that holding both would provide some form of protection - after all, one should always make money regardless of market direction, right?

This assumption couldn't be further from the truth, and the graph from early April 2025 demonstrates this perfectly.

Looking at the period from April 1st to April 14th, 2025, we see a striking anomaly: by April 9th, both SOXL and SOXS had fallen below their April 1st starting values. The benchmark index showed moderate volatility, yet somehow both the bull (SOXL) and bear (SOXS) ETFs managed to lose money simultaneously.

How is this mathematically possible? The answer lies in the fundamental structure of leveraged ETFs and reveals why they are particularly dangerous instruments for long-term investors.

The Structural Flaws of Leveraged ETFs

1. Daily Return Rebalancing

The critical detail many investors miss is that leveraged ETFs are designed to track daily returns, not extended periods. Each day, these funds rebalance to maintain their leverage ratio (3x in this case). This daily rebalancing creates a mathematical phenomenon where volatility - not just direction - becomes the enemy of returns.

2. The Path Dependency Problem

Look closely at the April graph: SOXS initially surged over 60% by April 8th as semiconductor stocks declined, while SOXL fell by approximately 50%. Then, when the market suddenly reversed direction on April 9th, SOXS plummeted, giving back all its gains and more. Meanwhile, SOXL rebounded but not enough to recover its earlier losses.

This illustrates "path dependency" - where the sequence of returns matters more than the net change. In a volatile market that ends up close to where it started, leveraged ETFs can experience significant erosion.

3. The Compounding Effect

The mathematics of compounding works against leveraged ETF investors in volatile markets. Consider a simple example:

If an index drops 10% one day and gains 10% the next, it's down roughly 1% overall (0.9 × 1.1 = 0.99).

A 3x long ETF would lose 30% then gain 30%: (0.7 × 1.3 = 0.91), resulting in a 9% loss. A 3x short ETF would gain 30% then lose 30%: (1.3 × 0.7 = 0.91), also resulting in a 9% loss.

This demonstrates how both products can lose value simultaneously over multi-day periods, even when the underlying index has minimal change.

Real-World Performance Analysis

The April 2025 data shows this theory in action:

• By April 8th: SOXS had gained over 60%, while SOXL had fallen approximately 50%
• By April 9th: A sharp reversal occurred, and both ETFs ended up below their April 1st starting values
• Overall volatility: The underlying index showed significant day-to-day fluctuations without a strong directional trend

This pattern isn't an anomaly - it's the expected mathematical outcome of how these products are designed to function. The more volatile the market, the more pronounced this effect becomes.

Who Should Use Leveraged ETFs?

Leveraged ETFs can be appropriate tools for:

1. Day traders: Those who enter and exit positions within a single trading day
2. Short-term tactical traders: Investors with a clear directional view over very brief periods (1-3 days)
3. Sophisticated risk managers: Professionals who fully understand the mathematics of daily rebalancing

They are decidedly not appropriate for:

1. Long-term investors: Those with holding periods of weeks, months, or years
2. Buy-and-hold strategies: The longer the holding period, the greater the potential divergence from expected returns
3. Volatility hedging: As we've seen, both long and short products can lose money in volatile markets

Conclusion: A Powerful Warning

The April 2025 performance of SOXL and SOXS serves as a powerful reminder that leveraged ETFs behave in ways that are counterintuitive to many investors. These are specialized tools designed for specific, short-term purposes - not vehicles for long-term investment.

Before considering leveraged ETFs, ask yourself:

• Do I fully understand the mathematics of daily compounding?
• Am I prepared to monitor and potentially trade these positions daily?
• Have I calculated how much return erosion might occur in a volatile market?

For most long-term investors, the answer to these questions will lead them away from leveraged products and toward more traditional investment vehicles that better align with their time horizons and risk tolerance.

Remember: in the world of leveraged ETFs, it's entirely possible for bulls and bears to both lose the race.