What is the daily rebalancing methodology and how does it affect performance over longer horizons?

Daily‑rebalancing methodology

Tradr’s 2×‑long single‑stock ETFs (DDOG and ASTRA) are structured as “daily‑rebalanced” leveraged funds. Each trading day the ETF’s portfolio is adjusted so that the net exposure to the underlying equity equals exactly 2 times the fund’s net asset value (NAV). The manager measures the previous day’s closing price, computes the required 2× exposure, and then buys or sells the underlying shares (or futures) to bring the fund back to that target. Any price movement that occurs during the day is therefore captured only once—in the daily return—while the exposure is reset at the close for the next day’s calculation.

Impact on longer‑horizon performance

Because the exposure is reset every day, the ETF’s return is a function of the sequence of daily price changes, not just the cumulative move of the stock. In a smooth, trending market the daily‑rebalancing works as intended and the ETF can deliver close to 2× the index’s return over weeks or months. However, in a volatile or sideways environment the daily reset creates “volatility decay”: gains on one day are partially erased by the opposite move the next day, and the compounding effect can cause the ETF’s long‑term return to lag the underlying equity’s simple 2× return. For a high‑beta AI‑infrastructure name like Datadog, where earnings surprises and macro‑tech cycles can generate sharp swings, the daily‑rebalancing amplifies short‑term moves but erodes value if held for extended periods.

Trading implications

- Use as a short‑term directional tool: The 2× ETFs are best suited for 1‑ to 5‑day plays on Datadog or Astera Labs when you have a strong conviction on the next‑day price move.

- Monitor realized volatility: As the daily‑rebalancing penalty rises with volatility, avoid holding the funds through earnings windows or macro‑tech risk events unless you’re prepared for rapid re‑balancing costs.

- Avoid long‑term exposure: For investors seeking multi‑month or multi‑year exposure to AI‑infrastructure equities, a traditional unleveraged position (or a 2× “non‑rebalanced” product) will outperform the daily‑rebalanced ETF over the same horizon.

In short, the daily‑rebalancing mechanism delivers the intended 2× exposure on a day‑by‑day basis, but the compounding effect can significantly degrade performance over longer horizons, especially in volatile markets. Keep the position short‑dated, size it to your risk tolerance, and be ready to exit before the next volatility‑driven reset.