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The top Canadian leveraged ETFs, listed

What is a leveraged ETF?

A leveraged ETF (Exchange-Traded Fund) is a type of ETF that aims to amplify the returns of an underlying index or asset class. Unlike traditional ETFs, which typically seek to replicate the performance of an index on a one-to-one basis, leveraged ETFs use financial derivatives and borrowing to magnify the daily returns of their underlying benchmark.

The most common types of leveraged ETFs are 2x (double leverage) and 3x (triple leverage) ETFs. A 2x leveraged ETF, for example, seeks to provide returns that are twice as much as the daily percentage change of its underlying index or asset. Similarly, a 3x leveraged ETF aims to deliver three times the daily returns of its underlying benchmark.

Here’s how a leveraged ETF works:

  1. Bullish and Bearish ETFs: Leveraged ETFs can be designed for both bullish (long) and bearish (inverse) market positions. Bullish leveraged ETFs seek to magnify the positive returns of an index, while bearish leveraged ETFs aim to magnify the inverse (negative) returns.
  2. Daily Tracking: It’s essential to understand that leveraged ETFs aim to achieve their leverage multiple on a daily basis. This means that they are optimized for short-term trading and not intended for long-term holding. Over longer periods, the performance of a leveraged ETF can deviate significantly from the multiple of the index it tracks, due to compounding and volatility.
  3. Risk and Volatility: Leveraged ETFs involve higher risk than traditional ETFs because of their daily compounding effect. Rapid market movements can lead to significant losses in leveraged ETFs, especially when the market experiences high volatility. As a result, they are considered more suitable for experienced and sophisticated investors who understand the potential risks and are actively monitoring their positions.
  4. Tracking Errors: Leveraged ETFs may experience tracking errors over time, meaning that their performance may deviate from the expected multiple of the underlying index. These deviations can be caused by expenses, borrowing costs, and the daily resetting nature of leveraged ETFs.

Given the complexity and potential risks involved, investors considering leveraged ETFs should thoroughly understand their structure, read the fund prospectus, and seek advice from a financial professional to determine if they are suitable for their investment objectives and risk tolerance.

What is an inverse ETF? (Canadian inverse ETF)

An inverse exchange-traded fund (ETF) is a type of ETF designed to provide returns that move in the opposite direction of a particular index or benchmark. In simple terms, an inverse ETF aims to generate gains when the target index or benchmark it tracks declines in value and vice versa.

Here’s how it works:

  1. Market Direction: If an investor believes that a specific market or sector is likely to decline, they can use an inverse ETF to profit from that downward movement. For example, if an investor expects the overall stock market to fall, they can invest in an inverse ETF that tracks a major stock market index, such as the S&P 500.
  2. Derivatives: Inverse ETFs typically use financial derivatives, such as futures contracts, options, or swaps, to achieve their inverse performance. These derivatives allow the ETF to capture the inverse movement of the underlying index.
  3. Daily Performance: It’s essential to understand that most inverse ETFs are designed to track the inverse of the daily performance of the index they follow. Due to compounding and the rebalancing of derivatives daily, their long-term performance may not precisely match the inverse of the index’s long-term performance.
  4. Risk and Volatility: Inverse ETFs can be riskier and more volatile than traditional ETFs because they are designed to magnify the opposite movements of the underlying index. They are typically suitable for short-term trading or hedging strategies rather than long-term buy-and-hold investments.

It’s important to note that inverse ETFs are complex financial instruments and are not suitable for all investors. Due to their risk and unique features, investors should thoroughly research and understand how these instruments work before considering them as part of their investment strategy. Investors should also carefully read the ETF’s prospectus and consult with a financial advisor if they are uncertain about their investment decisions.

The top Canadian leveraged ETFs

Leveraged ETFs are designed to amplify the returns of an underlying index or asset class, typically on a daily basis. In Canada, there are several leveraged ETFs offered by various asset management companies. Some of the top Canadian leveraged ETFs historically have included those that track major stock indices, such as:

  1. Horizons BetaPro S&P/TSX 60 Daily Inverse ETF (HIX)

    The Horizons BetaPro S&P/TSX 60 Daily Inverse ETF (HIX) is an exchange-traded fund (ETF) offered by Horizons ETFs Management (Canada) Inc. It is designed to provide daily investment results that correspond to the inverse (opposite) of the daily performance of the S&P/TSX 60 Index.

    HIX follows an inverse investment strategy, aiming to move in the opposite direction of the S&P/TSX 60 Index on a daily basis. When the index declines in value, HIX is designed to increase in value, and vice versa. This makes it suitable for investors looking to profit from short-term market downturns or as a hedging tool against declining equity markets.

    The S&P/TSX 60 Index is a widely recognized benchmark of the Canadian equity market. It represents the performance of 60 large and established companies listed on the Toronto Stock Exchange (TSX) and covers approximately 73% of the total market capitalization of the TSX.

    It’s important to note that HIX aims to deliver its inverse returns daily. Due to the compounding effect, the ETF’s performance may differ significantly from the inverse of the index’s returns over longer periods. Consequently, HIX is primarily designed for short-term trading and not for long-term buy-and-hold strategies.

    Inverse ETFs like HIX carry higher risks and can be more volatile than traditional ETFs due to the daily compounding nature of their investment strategy. Rapid market fluctuations can lead to substantial losses or gains, depending on the direction of the underlying index.

  2. Horizons BetaPro S&P/TSX 60 Daily Bull ETF (HXU)

    The Horizons BetaPro S&P/TSX 60 Daily Bull ETF (HXU) is an exchange-traded fund (ETF) provided by Horizons ETFs Management (Canada) Inc. It aims to deliver two times (2x) the daily performance of the S&P/TSX 60 Index.

    HXU follows a leveraged investment strategy, seeking to amplify the positive returns of the S&P/TSX 60 Index on a daily basis. When the index goes up, HXU is designed to provide returns that are twice the daily percentage change of the index, and vice versa.

    The S&P/TSX 60 Index is a widely recognized benchmark of the Canadian equity market, representing the performance of 60 large and established companies listed on the Toronto Stock Exchange (TSX).

    It’s important to note that HXU’s objective is to achieve twice the daily returns of the underlying index. However, due to the compounding effect, its performance may deviate significantly from two times the index’s returns over longer periods. As such, HXU is typically used for short-term trading and not as a long-term investment.

    Leveraged ETFs like HXU carry higher risks and can be more volatile than traditional ETFs. Rapid market fluctuations can lead to substantial gains or losses, depending on the direction of the underlying index.

    Given the complexity and potential risks associated with leveraged ETFs, investors should carefully consider their risk tolerance, investment objectives, and the suitability of such products in their portfolios. It’s advisable to seek guidance from a financial professional when considering leveraged ETFs or any investment with inherent risks.

  3. Horizons BetaPro S&P 500 Daily Inverse ETF (HIU)

    The Horizons BetaPro S&P 500 Daily Inverse ETF (HIU) is an exchange-traded fund (ETF) offered by Horizons ETFs Management (Canada) Inc. It is designed to provide daily investment results that correspond to the inverse (opposite) of the daily performance of the S&P 500 Index.

    HIU follows an inverse investment strategy, meaning it aims to move in the opposite direction of the S&P 500 Index on a daily basis. When the S&P 500 declines in value, HIU is designed to increase in value, and vice versa. This makes it a suitable option for investors seeking to profit from short-term market downturns or as a hedging tool against declining U.S. equity markets.

    The S&P 500 Index is one of the most widely followed benchmarks of the U.S. stock market. It represents the performance of 500 large-cap companies listed on U.S. stock exchanges and covers approximately 80% of the total U.S. equity market capitalization.

    It’s important to understand that HIU is optimized for daily performance, and its objective is to provide the inverse (opposite) daily returns of the S&P 500 Index. Due to the compounding effect, the ETF’s performance may differ from the exact inverse of the index’s returns over longer periods. As such, HIU is primarily designed for short-term trading and not for long-term buy-and-hold strategies.

    Inverse ETFs like HIU carry higher risks and can be more volatile than traditional ETFs due to the daily compounding nature of their investment strategy. Rapid market fluctuations can lead to substantial gains or losses, depending on the direction of the underlying index.

  4. Horizons BetaPro S&P 500 Daily Bull ETF (HSU)

    The Horizons BetaPro S&P 500 Daily Bull ETF (HSU) is an exchange-traded fund (ETF) offered by Horizons ETFs Management (Canada) Inc. It is designed to provide daily investment results that correspond to two times (2x) the daily performance of the S&P 500 Index.

    HSU follows a leveraged investment strategy, seeking to amplify the positive returns of the S&P 500 Index on a daily basis. When the S&P 500 goes up, HSU is designed to deliver returns that are twice the daily percentage change of the index, and vice versa. This makes it an attractive option for investors seeking to magnify their potential gains during periods of bullish market trends in the U.S. equity market.

    The S&P 500 Index is one of the most widely followed benchmarks of the U.S. stock market. It represents the performance of 500 large-cap companies listed on U.S. stock exchanges and covers approximately 80% of the total U.S. equity market capitalization.

    HSU aims to achieve two times (2x) the daily returns of the underlying S&P 500 Index. However, it’s important to note that due to the compounding effect, the ETF’s performance may differ significantly from two times the index’s returns over longer periods. As such, HSU is typically used for short-term trading and not as a long-term investment.

  5. Horizons BetaPro Crude Oil 2x Daily Bull ETF (HOU)

    The Horizons BetaPro Crude Oil 2x Daily Bull ETF (HOU) is an exchange-traded fund (ETF) provided by Horizons ETFs Management (Canada) Inc. It aims to deliver two times (2x) the daily performance of the NYMEX light sweet crude oil futures contract.

    HOU follows a leveraged investment strategy, seeking to amplify the positive returns of the daily changes in the price of crude oil. When the price of crude oil increases, HOU is designed to provide returns that are twice the daily percentage change of the underlying crude oil futures contract, and vice versa.

    The ETF achieves its leverage through the use of financial derivatives and borrowing. It offers investors a way to gain leveraged exposure to the price movements of crude oil without directly trading futures contracts.

    As with all leveraged ETFs, it is important to understand that HOU’s objective is to achieve two times (2x) the daily returns of the underlying crude oil futures contract. However, due to the compounding effect, the ETF’s performance may differ from two times the daily returns over longer periods. As such, HOU is typically used for short-term trading and not as a long-term investment.

Please note that leveraged ETFs are designed for short-term trading and may not be suitable for long-term investments due to compounding and tracking errors. They are not recommended for inexperienced investors or those with a low-risk tolerance.

It’s crucial to thoroughly research and understand the risks associated with leveraged ETFs before considering them as part of an investment strategy. Additionally, consult with a financial advisor or professional to determine if leveraged ETFs align with your investment goals and risk profile.

 

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