Leveraged & Inverse ETFs: Understanding Monthly Resets

Most leveraged/inverse ETFs reset their leverage daily, but some have monthly reset periods. In that case, the ETF provides leveraged or inverse returns to an index over a month-long period, rather than over one day. While this seems like an attractive alternative to the challenges created with daily reset products, the monthly reset option is "different" rather than "better" for most investors.

To be clear, the month-long period doesn't begin when you buy the ETF, it begins on a prespecified day—usually the first trading day of the month. Only those investors who buy and sell on the exact reset day will realize the intended leveraged or inverse exposure. While this offers the upside of achieving the desired multiple (e.g., 3x or -2x) over a one-month period without rebalancing, there's no flexibility as to when the period starts or stops.

A monthly reset product can produce a different set of returns than those with one-day resets. In choppy markets, the monthly reset may be an advantage, but in trending markets, the longer reset period means that the fund could be under- or overexposed within the month.

Ultimately, longer-term investors will still need to rebalance their exposure just as they would with a daily reset product. In fact, short-term investors will also need to rebalance their positions, since the multiple is only in effect for the stated period.

Next: Bond ETFs Vs. Bonds: Which Are Better?