The Dramatic Decline of Leveraged Bear ETFs – Understanding the Multi-Factor Phenomenon

The leveraged bear ETFs mentioned—ProShares UltraShort MidCap400 (MZZ), Direxion Daily S&P 500 Bear 3X Shares (SPXS), and Direxion Daily Financial Bear 3X Shares (FAZ)—have experienced extraordinarily steep declines from their 2008-2009 financial crisis highs to today’s sub-$15 prices.

This dramatic price erosion stems from a combination of structural aspects inherent to leveraged ETFs, particularly the mathematical realities of daily compounding, widespread use of reverse stock splits to maintain viability, and the fundamental challenge of maintaining inverse exposure during what has been the longest bull market in American history.

When examining these products, it becomes clear they were never designed for long-term holding, with their mechanics effectively ensuring price decay over extended periods regardless of market conditions. The story of these ETFs serves as a profound case study in how specialized financial products designed for specific tactical purposes can produce surprising and often devastating results when used inconsistently with their design.

The Fundamental Mechanics of Leveraged ETF Decay

Leveraged ETFs suffer from a mathematical phenomenon commonly referred to as “decay” or “volatility drag” that virtually ensures their long-term decline regardless of market direction. This decay occurs primarily because these funds reset their leverage daily, creating a compounding effect that erodes value over time1.

The daily rebalancing process forces these funds into a pattern of systematically “buying high and selling low” to maintain their target leverage ratio, which acts as a continuous drain on performance18. This is not a design flaw but rather an intrinsic characteristic of how these products function.

The mathematics behind this decay can be illustrated with a simple example: If an underlying index rises by 10% on day one and then falls by 10% on day two, it ends approximately 1% lower than where it started. However, a 3x leveraged inverse ETF would fall 30% on day one and then gain 30% on day two.

This doesn’t return the fund to its starting value but rather results in a loss of approximately 9%¹³. This effect is amplified by market volatility; the more volatile the underlying index, the more pronounced the decay becomes. During the highly volatile markets that followed the 2008-2009 financial crisis, these effects were particularly devastating for long-term holders of these products.

Beyond the mathematical decay, leveraged ETFs also face higher operational costs than standard ETFs. They typically carry much higher expense ratios, often exceeding 1% compared to the 0.10%-0.20% for passive ETFs¹³.

Additionally, the constant rebalancing creates significant transaction costs, and the derivatives used to create leverage incur their own expenses including roll costs and option theta (time decay)¹⁴. These costs compound over time, further eroding returns for long-term investors.

The Critical Role of Reverse Splits in Price History

A less obvious but equally important factor in the apparent price decline of these ETFs is the frequent implementation of reverse stock splits. As search result9 explains, “not all leveraged and inverse ETPs that trend toward nothingness necessarily de-list and close.

Some have used reverse share splits—exchanging multiple lower priced shares for a new, single share with a higher price—to prolong their existence”9. These reverse splits artificially increase the share price while proportionally reducing the number of shares outstanding, leaving the total investment value unchanged.

For funds experiencing significant decay over many years, these reverse splits have been essential to keep their share prices above exchange listing requirements.

Both the NYSE and Nasdaq require listed companies to maintain a minimum share price of $1.00, and facing delisting is a very real threat for decaying leveraged products19. Since 2008, funds like SPXS have undergone multiple reverse splits, each time artificially boosting the share price only to have it erode again. Without accounting for these splits, historical price comparisons become drastically misleading.

The search results specifically mention that “SPXS has lost 99.98% of its value, through many reverse splits”11. This pattern of decay followed by reverse splits explains how a fund that theoretically traded at $45,000 in 2008 could now be priced below $15 without actually going to zero. Each time the fund approached dangerously low price levels, a reverse split would artificially boost the quoted price, resetting the cycle.

Market Direction and Its Devastating Impact on Bear Funds

Perhaps the most straightforward factor in the decline of these specific ETFs is that they are all bear funds—designed to increase in value when their target index declines—during what has historically been one of the strongest and most sustained bull markets in history.

Following the market bottom in March 2009, the S&P 500 and other major indices have experienced extraordinary growth, which has been fundamentally devastating for products designed to profit from market declines.

The long-term performance of bear ETFs is intrinsically tied to the direction of their underlying indices. When these indices experience sustained growth, inverse ETFs will inevitably decline. This effect is then multiplied by the leveraging factor. As explained in search result5, “in a trending market, beta-slippage can be positive,” but this works against bear funds in a rising market5.

The same source notes that “when the underlying index gains 16.63%, SPXS declined by 37.4%,” demonstrating how bear funds can decline more than their stated leverage ratio would suggest in strongly trending bull markets5.

Compounding this challenge, leveraged ETFs are particularly vulnerable in periods of high volatility. Even when markets experience a mix of up and down days but end roughly where they started—what traders call a “sideways market”—leveraged ETFs will typically lose value.

A simple example from search result6 illustrates this: “If a normal stock starts Jan 1 2023 at $100 then on Feb 1 2023 is $95, then on March 1 2023 is $100, rinse repeat through the end of the year, that stock will have lost nothing on Jan 1 2024. However, a leveraged version of that stock at say 3x, will be down money because of decay”6.

Specific Analysis of the Mentioned ETFs

The three ETFs mentioned in the query share similar structural characteristics but with differences in their specific target indices that have contributed to their individual performance trajectories.

SPXS, the Direxion Daily S&P 500 Bear 3X Shares, provides triple-leveraged inverse exposure to the S&P 500 index. According to search result5, the historical average 12-month drift for SPXS is negative 3.11%5.

This ongoing negative drift, combined with the S&P 500’s strong performance since 2009, explains its dramatic decline. As of March 2025, SPXS was trading around $6.72, with analysts continuing to express bearish views on its prospects given Wall Street’s optimistic projections for the S&P 50011.

FAZ, the Direxion Daily Financial Bear 3X Shares, applies the triple-leveraged inverse strategy specifically to financial sector stocks. This sector was at the epicenter of the 2008-2009 crisis, explaining FAZ’s astronomical prices during that period.

However, as financial stocks recovered and then thrived in the subsequent years, FAZ experienced particularly severe decay. According to recent data, FAZ had a 12-month decay of 9.02% as of early 2023, with its concentrated sector exposure making it especially vulnerable to volatility5.

While specific information on MZZ (ProShares UltraShort MidCap400) is more limited in the search results, its mechanics are similar to the other funds discussed. As an inverse leveraged fund targeting mid-cap stocks, it would have been subject to the same decay dynamics, especially as mid-cap stocks have generally performed well in the post-2009 economic recovery.

The search results do mention that “the ProShares UltraShort Russell Mid-Cap Growth ETF which was closed in January 2015” had similar mechanics and ultimately closed after losing more than 90% of its value9, suggesting MZZ may have experienced comparable challenges.

Conclusion: Lessons for Leveraged ETF Investors

The dramatic price declines of MZZ, SPXS, and FAZ since the 2008-2009 financial crisis serve as a stark reminder of the unique risks associated with leveraged inverse ETFs, particularly when held over extended periods. These products have experienced a perfect storm of negative factors: the mathematical reality of daily rebalancing causing decay, multiple reverse splits artificially resetting prices, and the fundamental challenge of maintaining inverse exposure during an extended bull market.

Industry experts consistently emphasize that leveraged ETFs should only be used as short-term tactical trading vehicles by sophisticated investors who fully understand their mechanics.

As search result1 states, “leveraged ETFs are primarily used as short-term investment strategies by experienced traders that fully understand the risks associated with these funds”1. The experience of investors who purchased these funds near their 2008-2009 peaks and held them long-term serves as a cautionary tale about the importance of understanding a financial product’s design and intended use before investing.

For investors considering these products today, the historical lesson is clear: leveraged ETFs, particularly inverse ones, are designed for short-term tactical positioning rather than long-term investment.

Their structural characteristics virtually ensure that they will underperform their stated leverage ratio over extended holding periods, especially in volatile or trending markets. While they may serve valuable purposes for sophisticated traders with specific short-term objectives, they have proven devastatingly unsuitable for those seeking long-term exposure to market movements.

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