Trying to understand the toxicity of a Leveraged ETF as a hedge

Don't put money in things that you don't understand. ETFs won't kill you, ignorance will. The leveraged ultra long/short ETFs hold swaps that are essentially bets on the daily performance of the market. There is no guarantee that they will perform as designed at all, and they frequently do not. IIRC, in most cases, you shouldn't even be holding these things overnight.

There aren't any hidden fees, but derivative risk can wipe out portions of the portfolio, and since the main "asset" in an ultra long/short ETF are swaps, you're also subject to counterparty risk -- if the investment bank the fund made its bet with cannot meet it's obligation, you're may lost alot of money.

You need to read the prospectus carefully.

The propectus re: strategy.

The Fund seeks daily investment results, before fees and expenses, that correspond to twice the inverse (-2x) of the daily performance of the Index. The Fund does not seek to achieve its stated investment objective over a period of time greater than a single day.

The prospectus re: risk.

Because of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from twice the inverse (-2x) of the return of the Index over the same period. A Fund will lose money if the Index performance is flat over time, and it is possible that the Fund will lose money over time even if the Index’s performance decreases, as a result of daily rebalancing, the Index’s volatility and the effects of compounding. See “Principal Risks”

If you want to hedge your investments over a longer period of time, you should look at more traditional strategies, like options. If you don't have the money to make an option strategy work, you probably can't afford to speculate with leveraged ETFs either.

That's not 100% correct, as some leveraged vehicles choose to re-balance on a monthly basis making them less risky (but still risky). If I'm not mistaken the former oil ETN 'DXO' was a monthly re-balance before it was shut down by the 'man'

Monthly leveraged vehicles will still suffer slippage, not saying they won't. But instead of re-balancing 250 times per year, they do it 12 times. In my book less iterations equals less decay.

Basically you'll bleed, just not as much. I'd only swing trade something like this in a retirement account where I'd be prohibited from trading options.

Seems like you can get higher leverage with less risk trading options, plus if you traded LEAPS, you could choose to re-balance only once per year.

The fundamental issue with leverage (of any sort, really) is that the amplified downsides are extremely likely to more than cancel out amplified equivalent upsides.

Example without using a major swing: 2x leverage on a 5% decline (so a 10% decline). The 5% decline needs a 5.26% increase to get back level. However, the 2x leverage needs an 5.55% increase to get back. So a cycle for the unleveraged returns of -5%, +5.4% would see the unleveraged asset go up by a net +0.13% but 2x leverage would leave you at -0.28%. Conversely, imagine 0.5x leverage (it's easy to do that: 50% cash allocation): after an underlying -5%, the 0.5x leverage needs only +5.13% to reach par. This is basically the argument for low volatility funds.

Of course, if you can leverage an asset that doesn't go down, then the leverage is great. And for an asset with an overall positive compound return, a little leverage is probably not going to hurt, simply because there are likely to be enough upsides to cancel out downsides.