As market volatility reaches historic highs, investors are responding in various ways, including investing in funds that promise to deliver returns that are either a positive or inverse multiple of a stated index. In a monthly series, Rodney N. Sullivan considers how volatility of returns can adversely affect investors’ wealth accumulation over time.

How popular are leveraged funds?
The financial meltdown has shifted investor attitudes towards financial risk. While many investors have shunned investment risk entirely, others have responded using leveraged exchanged-traded funds to accept more risk in the hope of recapturing losses. These funds incorporate leverage in an attempt to double (2X) or triple (3X) market returns or the inverse of market returns. Globally, there are about 145 such funds with some $27bn (£18bn, €20bn) in assets, according to data provided by Morningstar.