The headline from marketwatch.com reads Proposed funds up the ante to magnify stock market returns threefold.  So now it's party time because we're now going to average a return of about 30% per year given the conservative estimated 10% return per year on the S&P 500.  Before we go dancing in the streets, let's splash a cold dose of reality on this.  The fine print reads that they're attempting to mimic the move of the tracking index day to day, but returns over time may suffer tracking error.  Folks, tracking error is code for things won't add up and it certainly won't be in your favor.  When tracking error is discussed this is always referred to as returns less than that of the tracked index or basket.  Another misleading piece of the article is the reference to magnifying returns threefold.  Although returns are generally referred to in a positive context and risk is generally referred to in a negative context, let's focus on returns as both negative and positive.  So 3x returns also means 3x the losses.  Is this something you can deal with in your portfolio?

Let's have a look at how a simple 2x leverage fund stacks up against 1x ETFs.  This simple chart plots the QQQQ against its 2x leveraged product the QLD.

(click to enlarge)

Over the last two years, the leveraged ETF when simply held has created nothing but stomach churning.  And when the going got tough, the leveraged product got rough.  This product may be great for day trading and maybe swing trading, but buy and hold is clearly another story.  Based on this chart, you can probably devise a system for when the leveraged product deviates from the non-leveraged product to do a little pair trading or long one and/or short the other.  But that's also wild and speculative.  My point is that for a buy and hold investor, this doesn't make any sense.