Do you want to double or triple the performance results of underlying indices? If so, leveraged ETFs might be a good investment for you.
My breakdown of the best leveraged ETFs in Canada will show you some suitable investments for that purpose.
Be careful because it cuts both ways, and your losses could be amplified as well. We’ll go into the downsides and risks of leveraged ETFs as well.
What Are Leveraged ETFs?
Leveraged ETFs use financial derivatives and debt as leverage to enhance the returns of an underlying index.
A typical ETF tries to match the performance of its benchmark index over time – a leveraged ETF attempts to double or triple the daily returns of an underlying index.
How Do Leveraged ETFs Work?
Leveraged ETFs work differently than traditional funds because they attempt to amplify the daily returns of an underlying index instead of trying to match the performance over a longer timeframe.
The fund manager uses borrowed money to buy derivatives like options and futures contracts to amplify the returns.
Leveraged funds are riskier assets to own than traditional ETFs because the leverage they use is a double-edged sword.
These funds enhance the daily returns, multiplying them twice or thrice. It means that any gains are amplified, implying greater returns for the daily performance of the benchmark index.
It also means any losses are also enhanced, entailing a higher degree of capital risk.
Leveraged ETFs also cost more than most ETFs because the fund manager rebalances the fund’s holdings daily. If you were thinking about taking on a margin loan to invest, a leveraged ETF could be a good alternative to that strategy.
Types of Leveraged ETFs
Leveraged ETFs can be categorized based on several factors, including the degree of leverage they offer, the underlying assets they track, and their investment strategies. Here are the most common types:
- Equity Leveraged ETFs: These funds amplify the daily returns of stock indices. Examples from the article include the Horizons BetaPro Gold Bullion 2x Daily Bull ETF and the ProShares UltraPro QQQ ETF.
- Commodity Leveraged ETFs: These target commodities like gold, oil, and silver. The Horizons BetaPro Crude Oil 2x Daily Bull ETF is an example.
- Inverse Leveraged ETFs: These funds aim to profit from the decline of an asset or index. If the underlying index falls by a certain percentage, the ETF aims to gain double or triple that amount.
- Sector-specific Leveraged ETFs: These focus on specific sectors, such as technology, healthcare, or financials, amplifying the returns of indices that track these sectors.
Best Leveraged ETFs In Canada
- Horizons BetaPro Gold Bullion 2x Daily Bull ETF (HBU.TO)
- Hamilton Enhanced Canadian Bank ETF (HCAL.TO)
- Horizons BetaPro Canadian Gold Miners 2x Daily Bull ETF (HGU.TO)
- Horizons BetaPro Crude Oil 2x Daily Bull ETF (HOU.TO)
- Horizons BetaPro NASDAQ-100 2x Daily Bull ETF (HQU.TO)
1. Horizons BetaPro Gold Bullion 2x Daily Bull ETF (HBU)
- Ticker: HBU.TO
- Inception Date: January 22, 2008
- Assets Under Management: $11.7 million
- Management Expense Ratio: 1.65%
- Stock Price: $10.84
- YTD Return: -2.28%
Horizons BetaPro Gold Bullion 2x Daily Bull ETF (HBU) is a fund that seeks to provide you with daily investment results while attempting to enhance the returns of its benchmark index by 200%.
HBU ETF tracks the performance of the Solactive Gold Front Month MD Rolling Futures Index ER.
The benchmark index tracks the performance of the front-month gold futures contracts and rolls the exposure over from the active contract into the next active contract.
Investing in HBU ETF means investing in the positive price movement for gold futures contracts, with your investment returns (and potential losses) enhanced two-fold. HBU ETF comes with a pretty high MER, though.
2. Hamilton Enhanced Canadian Bank ETF (HCAL)
- Ticker: HCAL.TO
- Inception Date: October 14, 2020
- Assets Under Management: $402.02 million
- Yield: 8.36%
- Management Expense Ratio: 1.06%
- Stock Price: $19.57
- YTD Return: -2.46%
Hamilton Enhanced Canadian Bank ETF (HCAL) is a fund that seeks to provide you with enhanced investment returns from the daily performance of the Solactive Canadian Bank Mean Reversion Index TR.
Investing in HCAL ETF means investing in the performance of the Big Five Canadian banks.
Unlike other leveraged funds, HCAL ETF does not use derivatives to enhance investment returns and seeks to provide you with 1.25 times the returns of its benchmark index.
The modest 25% cash leverage significantly reduces the risk and the returns compared to leveraged ETFs that target twice or thrice the daily returns of the benchmark index.
3. Horizons BetaPro Canadian Gold Miners 2x Daily Bull ETF (HGU)
- Ticker: HGU.TO
- Inception Date: June 25, 2007
- Assets Under Management: $85.03 million
- Management Expense Ratio: 1.34%
- Stock Price: $9.4
- YTD Return: -19.53%
Horizons BetaPro Canadian Gold Miners 2x Daily Bull ETF (HGU) is a fund designed to provide you with investment returns that are twice the daily investment results of the Solactive Canadian Gold Miners Index.
The benchmark index tracks the performance of a basket of publicly listed Canadian companies that have significant gold mining operations.
Investing in HGU ETF means investing in the performance of a basket of Canadian companies that primarily rely on their gold mining operations and getting two-fold returns.
The daily bull aspect of this fund means its returns correspond with the positive price movement, providing you with a two-fold upside when the fund moves upward and two-fold losses when it declines.
4. Horizons BetaPro Crude Oil 2x Daily Bull ETF (HOU)
- Ticker: HOU.TO
- Inception Date: January 15, 2008
- Assets Under Management: $87.78 million
- Management Expense Ratio: 1.36%
- Stock Price: $13.3
- YTD Return: 10.71%
Horizons BetaPro Crude Oil 2x Daily Bull ETF (HOU) seeks to provide you with daily investment results that endeavour to correspond to twice the daily performance of the Horizons Crude Oil Rolling Futures Index.
The fund’s benchmark index is designed to provide accurate returns mirroring the holding of its underlying commodity contract: the WTI Crude Oil price.
Investing in HOU ETF means getting twice the daily returns of the WTI Crude Oil futures contracts, exposing you to the enhanced performance of oil futures contracts.
5. Horizons BetaPro NASDAQ-100 2x Daily Bull ETF (HQU)
- Ticker: HQU.TO
- Inception Date: June 17, 2008
- Assets Under Management: $261.2 million
- Management Expense Ratio: 1.47%
- Stock Price: $18.31
- YTD Return: 2.83%
Horizons BetaPro NASDAQ-100 2x Daily Bull ETF (HQU) seeks to provide you with investment returns that attempt to correspond with two-fold the daily investment results of the NASDAQ-100 Index.
HQU ETF is a fund denominated in Canadian dollars. It means that any US dollar gains or losses due to the fund’s investments are hedged back to the Canadian dollar.
Investing in HQU ETF means investing in the performance of the 100 largest US-listed, international, and non-financial publicly-traded companies listed on the NASDAQ stock market, based on market cap. HQU ETF comes with an MER of 1.47%.
Best US Leveraged ETFs
- ProShares UltraPro QQQ ETF (TQQQ)
- ProShares Ultra QQQ ETF (QLD)
- ProShares Ultra S&P 500 ETF (SSO)
- ProShares UltraPro S&P 500 ETF (UPRO)
- Direxion Daily Small Cap Bull 3x Shares ETF (TNA)
- Ticker: TQQQ
- Inception Date: February 9, 2010
- Assets Under Management: US$16.28 billion
- Yield: 1.44%
- Management Expense Ratio: 0.95%
- Stock Price: $56.74
- YTD Return: 3.96%
ProShares UltraPro QQQ ETF (TQQQ) is a fund that seeks to provide you with three-fold the returns of the NASDAQ-100 Index.
The US-listed ETF seeks daily investment results corresponding to three times the daily performance of its benchmark index.
TQQQ ETF magnifies gains and losses by a significant margin, entailing substantial capital risk if its benchmark index underperforms.
Investing in TQQQ ETF means investing in the daily investment results of the performance of the 100 largest stocks listed on the NASDAQ stock exchange based on market capitalization.
TQQQ ETF is traded in US dollars.
- Ticker: QLD
- Inception Date: June 19, 2006
- Assets Under Management: US$4.64 billion
- Yield: 0.18%
- Management Expense Ratio: 0.95%
- Stock Price: $82.31
- YTD Return: 2.95%
ProShares Ultra QQQ ETF (QLD) is a fund that seeks daily investment results that correspond to two times the daily performance of the NASDAQ-100 Index.
It is also a US-listed fund that uses leverage to enhance investment returns, similar to TQQQ ETF. However, it attempts to provide you with twice the returns of its benchmark index.
Investing in QLD ETF means investing in the daily investment results of the performance of the top 100 publicly-traded companies listed on the NASDAQ stock exchange based on market capitalization.
- Ticker: SSO
- Inception Date: June 19, 2006
- Assets Under Management: US$3.79 billion
- Yield: 0.34%
- Management Expense Ratio: 0.89%
- Stock Price: $69.62
- YTD Return: 2.64%
ProShares Ultra S&P 500 ETF (SSO) is a fund that seeks daily investment results that emulate twice the daily returns of the S&P 500 Index.
The US-listed ETF uses leverage to enhance the investment returns to two-fold the performance of the benchmark index.
The fund’s underlying index is a widely used measure of large US stock market performance, comprising the top 500 largest publicly-traded companies listed in the US stock markets based on market capitalization.
- Ticker: UPRO
- Inception Date: June 23, 2009
- Assets Under Management: US$2.41 billion
- Yield: 1.02%
- Management Expense Ratio: 0.91%
- Stock Price: $60.28
- YTD Return: 3.66%
ProShares UltraPro S&P 500 ETF (UPRO) is a fund that seeks daily investment results that correspond to thrice the daily returns of the S&P 500 Index.
The US-listed fund enhances the performance of its benchmark index by three times, significantly amplifying positive and negative movements.
The fund’s underlying index tracks the performance of 500 of the largest publicly traded companies listed on US stock exchanges based on market capitalization. UPRO ETF comes with an MER of 0.91%.
- Ticker: TNA
- Inception Date: November 5, 2008
- Assets Under Management: US$1.25 billion
- Yield: 1.32%
- Management Expense Ratio: 1.05%
- Stock Price: $34.74
- YTD Return: -13.04%
Direxion Daily Small Cap Bull 3x Shares ETF (TNA) is a fund that seeks daily investment results that are threefold the performance of the Russel 2000 Index.
The US-listed ETF tracks the performance of a broad US stock market index that measures the performance of 2,000 smaller publicly-traded companies listed on US stock exchanges based on market capitalization.
TNA ETF attempts to use derivatives and debt instruments to provide you with thrice the daily investment results of its benchmark index.
Investing in TNA ETF means investing in the bullish performance of small-cap stocks listed in the US. TNA ETF comes with an MER of 1.05%.
Can I Buy Leveraged ETFs In TFSA?
Yes, it is indeed possible for you to buy and hold leveraged ETFs in your TFSA if you want to capitalize on the enhanced returns these financial instruments can provide without incurring capital gains tax.
However, it would be a risky proposition.
Leveraged ETFs are best used as short-term investments, and the TFSA is ideal for long-term investments.
Using your TFSA contribution room to hold leveraged ETFs for a short time could result in you coming into the view of the Canada Revenue Agency and losing the tax-free status of your account.
Choosing to use your TFSA to buy and hold leveraged ETFs for the long term could result in significant losses if the fund underperforms.
Additionally, you cannot claim your losses when filing your taxes because you make contributions to your TFSA with after-tax dollars.
How To Buy Leveraged ETFs In Canada
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Conclusion
Leveraged ETFs are complex and speculative short-term investments that entail a higher degree of capital risk than most other ETFs.
By doubling or tripling the daily return of a specified index, the funds can provide you with substantial upside on your initial investment or devastate your returns.
Provided that you are willing to assume the risk that comes with these leveraged ETFs, this breakdown of the best leveraged ETFs in Canada covers several financial instruments you could consider adding to your portfolio.
If you are a risk-averse investor and are okay with creating a passive income stream with lower but fixed returns on your investment, you might want to check out my breakdown of the best bond ETFs in Canada.
