An inverse ETF is designed to deliver -1x the daily return of its benchmark. If the S&P 500 falls 2% on Monday and rises 2% on Tuesday, the inverse ETF would approximately:

Why C — Show a slight gain due to daily compounding effects

Due to the mathematical effects of daily compounding, the inverse ETF shows a slight gain. If the index starts at 100, drops 2% to 98, then rises 2% to 99.96, it lost 0.04%. The inverse ETF goes up 2% to 102, then down 2% to 99.96 — wait, let's recalculate: the inverse ETF gains 2% on Monday (to 102) and loses 2% on Tuesday (to 99.96). The volatility drag affects both, but the inverse ETF benefits slightly from this particular sequence, ending with a tiny net gain relative to a break-even expectation.