## [# 3 Things To Know About Daily Rebalancing ETFs](/sections/etf-education-series/3-things-know-about-daily-rebalancing-etfs)
# 3 Things To Know About Daily Rebalancing ETFs
Daily rebalancing can boost returns, but beware: choppy markets, capital gains taxes, and fees can erode NAV. Learn the risks before you invest.
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[By Karrie Gordon](/authors/karrie-gordon)
Oct 10, 2025
Edited by: ETF.com Staff
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The last few years brought a rise in popularity for ETF strategies built around daily rebalances. Understanding the nuances, opportunities, and potential drawbacks to ETFs with portfolios that rebalance daily creates the potential for better investment outcomes in your portfolio. And while leveraged and inverse ETFs take the lion’s share of the category, a growing number of ETFs offer different takes on daily rebalances.
Daily portfolio rebalancing entails buying and selling assets every day to ensure the portfolio maintains the right risk profile or adheres to a specific strategy. There are potential rewards and specific risks to be aware of in strategies that rebalance frequently, particularly around leveraged and inverse ETFs.
### Rebalancing Can Reduce Asset Allocation Divergence
Daily rebalances ensure that a strategy most closely adheres to its stated objective, keeping any style factors aligned and maintaining the desired weights (such as a traditional 60% equity, 40% bond portfolio). It also allows a portfolio to maintain the desired risk profile, which can be advantageous in volatile or rapidly moving markets. This added flexibility can be a boon in periods of ongoing market volatility or market regime changes.
### Performance Is Linked More to Market Directionality Trends
Cumulative performance for daily rebalancing strategies often depends more on which directions markets move daily than it does market performance in a set time period – though this matters too. This is particularly true in leveraged and inverse strategies. The overall change of the market in a month will be reflected in the fund, but whether the market moved up in a series of days, or down, or was choppy can have an outsized impact on returns.
The effect of daily compounding magnifies this, so that a month of daily steady gains can mean the portfolio that rebalances daily outperforms one that rebalances once a month. However, a period of volatility or drawdowns means a daily rebalancing strategy will lock in more realized losses over a month than one that rebalances at the end of the month.
### Frequent Trading Can Impact Fees, Taxes
ETFs benefit from the in-kind creation and redemption mechanism that occurs on the primary market with authorized participants. These trades don't trigger capital gains and the ETF generally doesn't foot the bill for transaction costs. This means that some ETFs that rebalance daily have trimmed their management fees to competitive levels. However, others reflect the cost of high internal turnover in their expense ratio. As before, this is most true in ETFs that use derivatives and rebalance daily.
Those strategies that use futures contracts rolling on a daily basis carry further risk because of contango, when futures prices are higher than the security itself. This can drive up trading costs, which in turn cuts into the fund’s NAV. And despite the in-kind redemption mechanism, for the ETFs that use complex derivatives and rebalance daily, the likelihood of the fund realizing and distributing short-term capital gains at the end of the year regardless of fund performance can be higher.
## Types of ETFs that Rebalance Daily
There are a growing number of ETFs on the market today with portfolios that rebalance daily.
**Active ETFs** - Most active strategies do not rebalance their portfolios daily, though many have the capacity to rebalance as market conditions change. However, Dimensional built their entire investment thesis around looking at daily rebalances to keep portfolios from drifting and avoiding steep trading costs that come with quarterly rebalancing strategies. If you’re curious about the thesis, you can [go here](https://www.etf.com/sections/conferences/rigid-indexed-approach-leaves-money-table) to watch Dimensional’s Global Head of Investment Solutions talk more about the approach.
**Leveraged and Inverse ETFs** - These strategies work to deliver specific multiples (2x, 4x, etc) of an underlying asset’s daily performance. They’re designed to be held on a single day basis only, generating leveraged or inverse daily performance using derivatives. Holding longer than a day distorts returns, often eroding performance, usually significantly. These strategies have magnified risk, with elevated volatility profiles. Indeed, some of the [most volatile ETFs this year](https://www.etf.com/sections/features/10-most-volatile-etfs-2025) have been from this category.
**Volatility ETFs** - Some strategies that offer targeted volatility profiles as well as a handful of ETFs that track futures on the Cboe Volatility Index (VIX) reset on a daily basis. Given the volatile nature of the VIX in recent years, VIX futures have resulted in some significant swings, and ETFs that track them make the same shortlist for most volatile ETFs this year.
**Covered Call Writing** - While daily covered call writing on the benchmark indices isn’t new, ProShares offers an expanding suite of ETFs that use daily covered calls. The goal of the strategy is to maximize market participation and income, while offering better downside protection than monthly covered call strategies. If you want to learn more, [go here](https://www.etf.com/sections/conferences/simeon-hyman-future-proof-daily-call-writing-etfs) to watch ProShares’s Global Investment Strategist talk about the innovative strategy.
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[ Karrie Gordon Content Producer ](/authors/karrie-gordon)
Karrie is the content producer for ETF.com, where she wrangles videos, podcasts, and general media, while making time to write about any number of… [View Bio](/authors/karrie-gordon)
Related Topics [Leveraged](http://www.etf.com/topics/leveraged)
[Volatility](http://www.etf.com/topics/volatility)
[Inverse](http://www.etf.com/topics/inverse)
[Data Dive](http://www.etf.com/topics/data-dive)