Leveraged or inverse ETF
Rules, protection and tax below are for Canada.
What it is
An ETF built to deliver two or three times an index's daily return, or the opposite of it. The word that matters is daily. The fund resets every day, so over longer periods its return is not two times the index's return; it drifts, usually downward, because of how gains and losses compound.
That drift is not a flaw in one product; it is the mathematics of daily leverage. In a choppy market a leveraged fund can lose money while the index ends flat, and an inverse fund can lose money while the index falls.
These are tools for professionals holding positions for hours or days. Sold to retail as a way to get rich faster, they mostly get people poorer faster.
How it works
- The fund uses swaps and futures to gain leveraged exposure to the index, rebalanced at every close.
- Each day's return is the multiple of that day's index return, minus costs.
- Over several days the returns compound, so the multi-day result depends on the path, not just the endpoint.
- Fees and the cost of the derivatives are well above those of a plain index fund.
The honest pros and cons
For
- Amplified exposure without a margin account, for very short holding periods.
- Losses are limited to what you put in, unlike CFDs or futures.
- Inverse funds let you bet against a market without borrowing shares.
Against
- Daily resetting means multi-week returns can be far below the multiple you expected, even negative in a flat market.
- Losses are doubled or tripled in every downturn.
- High fees and derivative costs every day you hold.
- Marketed to the people least equipped to understand the arithmetic.
Getting it in Canada
not researchedWherever you are
- Ask whether you are trading for days or investing for years; if years, this is the wrong tool.
- Read the fund's own example of how a flat, choppy market loses money; every prospectus has one.
- If you still use one, size it so a total loss would not change your life, and set a date to get out.
Go deeper
Also called
2x ETF, 3x ETF, inverse ETF, short ETF, geared fund
Often confused with
- Stock index ETF: A fund traded on an exchange that copies a stock market index at low cost.
- Contract for difference: A bet on a price move made with borrowed exposure; you never own the asset and pay daily interest on the borrowed part.