Measure
Variance drag
The gap between the average of periodic returns and the return actually compounded, which widens with volatility. Formula: geometric ≈ arithmetic − σ² / 2.
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%.
Measured on real funds
16The gap between the average annual return and what actually compounded. Not an opinion about volatility: arithmetic, and wider the more a fund moves.
| Fund | Drag | Average vs compounded |
|---|---|---|
| SMH | 4.51 pp | 15.2% average vs 10.6% compounded |
| QQQ | 2.25 pp | 12.9% average vs 10.7% compounded |
| XLK | 2.23 pp | 12.6% average vs 10.4% compounded |
| VWO | 1.82 pp | 9.1% average vs 7.3% compounded |
| VEA | 1.46 pp | 6.9% average vs 5.4% compounded |
| VT | 1.05 pp | 10.0% average vs 8.9% compounded |
| VGT | 0.95 pp | 15.9% average vs 15.0% compounded |
| VXUS | 0.92 pp | 7.7% average vs 6.8% compounded |
| VTI | 0.77 pp | 10.5% average vs 9.7% compounded |
| VUG | 0.73 pp | 12.9% average vs 12.2% compounded |
| VTV | 0.64 pp | 10.4% average vs 9.8% compounded |
| VIG | 0.42 pp | 10.7% average vs 10.3% compounded |
| SCHD | 0.14 pp | 13.5% average vs 13.4% compounded |
| VOO | 0.07 pp | 14.8% average vs 14.7% compounded |
| BND | 0.06 pp | 3.0% average vs 2.9% compounded |
| AGG | 0.06 pp | 3.1% average vs 3.0% compounded |
Computed from Yahoo Finance monthly total return, recomputed with every update of the site. How these figures are produced.
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
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- 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 →