Launchpad Vs. Trap: How is Basic Capital different from
Leveraged ETFs?

In this piece, we’ll unpack 2x leveraged ETFs, explain why they are a trap for long-term investors, and show how Basic Capital is fundamentally different—and a superior tool.

What Are 2x Leveraged ETFs?

A 2x leveraged ETF is an exchange-traded fund designed to amplify daily returns. If the S&P 500 moves up or down, these ETFs aim to multiply that move by two. If the market rises 1%, the ETF gains 2%. They achieve this leverage not by borrowing funds but by using financial derivatives like futures.

But like many tools, 2x leveraged ETFs come with a twist—one that makes them extremely unsuitable for long-term, buy-and-hold passive investors. Let’s see how:

The Problem with Leveraged ETFs: Loss-Locking Resets

Here’s the catch with leveraged ETFs: they rebalance daily. At the end of each day, the managers reset the exposure to ensure the fund delivers exactly 2x the net amount invested in the ETF. While this sounds like diligent housekeeping, it can work against you over time. Here’s how:

Suppose you start with $100 invested in a 2x leveraged ETF, giving you $200 in exposure (2:1 leverage). Now, let’s assume the market declines by 10%, reducing your exposure by $20. Your original $100 investment is now worth $80.

This 10% decline reduces your $200 exposure to $180. Since the $20 loss is realized, your leverage increases to $180/$80 or 2.25x. To maintain 2x daily exposure, the ETF manager rebalances by selling some of the derivatives to reduce exposure to $160 (2x your $80).

Here’s the problem: the market must now rise by 25% to recover your original $200 exposure. This process, known as rebalancing, eats away at returns over time due to “volatility drag.” Volatility drag means the percentage gain required to recover from a decline is larger than the decline itself.

A Different Approach: Investing Like a Mortgage

Now, let’s consider a different strategy: taking out a long-term amortizing loan, like a mortgage, to invest in the market. Think of it like buying a house, once you lock in your loan terms, you don’t need to reappraise or adjust the loan daily. Similarly, Basic Capital provides long-term financing to invest in the S&P 500 without the inefficiencies of constant rebalancing. You’re not forced to buy high or sell low—you let time and market growth work in your favor.

Using the same example and maintaining the same leverage for simplicity, a $100 investment with 2:1 leverage through Basic Capital gives you $200 of exposure. If the market declines by 10%, your exposure falls to $180, increasing your leverage to 2.25x. With Basic Capital, you don’t rebalance daily or post additional margin. The market only needs to rise 12.5% ($20/$180) to return to the original $200 exposure, compared to 25% ($40/$160) for a 2x leveraged ETF.

In other words, Basic Capital reduces the volatility drag associated with leveraged ETFs because it doesn’t require daily rebalancing.

Who Are Leveraged ETFs Suitable For?

Leveraged ETFs aren’t all bad. They’re an effective, easy way to gain leverage for short-term traders seeking to capitalize on market movements over a few days or weeks. However, for long-term investors, constant rebalancing creates a dynamic where the ETF sells when the market is down, amplifying volatility drag.

This rebalancing is problematic because while markets exhibit a “random walk” in the short-term (up and down volatility), they show a “positive drift” in the long-term (steady appreciation). Investors in leveraged ETFs can’t fully benefit from this positive drift because of the volatility drag created by selling low during market declines

So Where Does This Leave Us?

Leverage is the ability to do more with less. It can be achieved in various ways: margin loans, leveraged ETFs, mortgages, and now Basic Capital.

Leveraged ETFs lock in losses and rebalance daily, meaning it takes longer to recover from a market downturn. Basic Capital minimizes this volatility drag by avoiding daily rebalancing. Designed for long-term investors, Basic Capital offers a buy-and-hold, passive, and effective strategy to build more wealth with less.