Tracking error exists even in unleveraged ETFs, but usually to a lesser extent than leveraged ones.  Those who bought SH on Oct 10 are currently worse off than those who shorted SPY (SPY down 2.5%, SH up only 1.5%), as of yesterday's close.  Tracking error can also work in your favour, depending on which ETF you happen to use and how you use it (buy/short).  Those who shorted SSO (2X bear) on Oct 10 are currently better off than those who bought SDS (2X bear).  As of yesterday's close, SSO is down 6.0%, which is more than twice as much as the S&P500 and SPY are down.  By contrast, SDS is up only 2.2%.  Hindsight is 20/20, of course.  Trade duration, market direction and volatility cannot be known in advance, so there's luck involved in choosing the "best" ETF for a particular trade and in choosing how to use it.  If you want to use leveraged ETFs in order to have more cash available for other things, it's probably best to be consistent in which ETF you use and how you use it.  Over the long-term, a consistent approach should reduce the effect of tracking error.  It will work in your favour for some trades and against you for others.  Your long-term profit and risk should be similar to the system performance.  If you don't want more cash on hand, then buying and shorting SPY will mirror system performance most closely of course.

Peace.