Measure
Variance drag
Definition
The gap between the average of periodic returns and the return actually compounded, which widens with volatility.
Formula
geometric ≈ arithmetic − σ² / 2
How to read it
Two funds with the same average return compound differently if their volatility differs; the more volatile one ends lower. A +50% followed by a −50% averages zero and compounds to −25%.
What it does not tell you
It explains a mechanical gap, not a direction. It is often stretched into a claim that leveraged funds must lose over time — drag is real, but realised outcomes also depend on the path and trend of the underlying, not on drag alone.
Applied in 20 articles
20- Why Median Wealth Trails Average Wealth: Skewness, Compounding, and Realistic Expectations
- Fractional Kelly: A Disciplined Way to Size a High-Volatility Satellite Sleeve
- The Diversification Return: Why Rebalancing Can Add Yield Even When Nothing Outperforms
- Why I Track Drawdown Recovery Time, Not Just Max Drawdown
- Why Variance Drag Quietly Destroys Leveraged ETF Returns
- The Ultimate 2026 Hybrid Portfolio: How to Mix Classic ETFs with AI Quant
- Asset Allocation in Practice: How 10% Weight Shifts Reshape Long-Term Outcomes
- The Rule of 72 in Practice: What Realized ETF Returns Say About Doubling Time
- Why Capital Preservation Is the Secret to Winning with Leveraged Assets
- Hedging a Leveraged Sleeve: A Framework Built Before the Volatility Arrives
- What Rising Interest Rates Mean for Leveraged ETF Borrowing Costs
- Leveraged ETFs vs Index ETFs: What Daily Reset Actually Costs a Long-Term Holder
- Can Leveraged ETFs Be Part of a Long-Term Portfolio? Risk Mitigation Strategies
- The Honest Math of Leveraged ETFs - Path Dependency, Volatility Decay, and the Behavioral Gap
- Leveraged ETF Satellites in a Long-Term Core: The Drawdown Math Most Plans Skip
- The Honest Math of Leveraged ETFs: What Long-Horizon Investors Need to Understand Before Holding 2x or 3x
- QLD vs SSO: What 2x Leveraged ETFs Actually Cost a Long-Term Holder
- VOO vs QQQM vs TQQQ: What 5-Year Volatility and Drawdown Tell Us About Leverage in a Long-Term Core
- The Honest Math of Leveraged ETFs: A 5-Year Data Read on TQQQ, SSO, and UPRO
- Volatility vs. Permanent Loss: What Risk Actually Means for Long-Term ETF Investors
Every figure computed with this measure on this site follows the conventions set out in the methodology. All measures →