Shorting Leveraged ETFs: A Free Lunch or Just an Expensive One?

Testing the Volatility-Decay Trade and What Survives Real-World Costs

Leveraged ETFs are known to suffer from volatility decay, particularly in turbulent markets. That suggests an intuitive trade: Short leveraged ETFs while hedging their market exposure. With directional exposure largely neutralized, the portfolio should be positioned to harvest the decay.

This week, I examine recent research on this trade and several related implementations, extend the evidence through July 2026, and test what survives key implementation frictions. Most versions become considerably less attractive, but one appears more robust.