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Inverse and leveraged ETFs: Tread carefully

rcarrick@globeandmail.com

What we're looking at

Leveraged and inverse exchange-traded funds are a tool for sophisticated investors to profit on moves up or down by select stock indexes and commodities. Holdings in these ETFs need to be adjusted daily to work properly, but what happens if you buy and hold?

Our screen

Here's a list of leveraged and inverse ETFs and their returns over the past one- and two-year periods. Leveraged ETFs give you two times the underlying move in a stock index or commodity, which magnifies both gains and losses. Inverse ETFs allow you to profit from the opposite of whatever the underlying investment does.

What we found

Quite a few investors got into trouble with leveraged and inverse ETFs when they were introduced a few years back by taking a buy-and-hold approach. There are several examples here of these ETFs causing substantial losses when held over one- or two-year periods.

There are also some exceptions, however. Natural gas prices have fallen hard in the past two years and the Horizons BetaPro NYMEX Natural Gas Inverse ETF has been a very strong one- and two-year performer. This ETF allows investors to profit from declining gas prices.

Don't be lulled into taking a long-term approach with inverse and leveraged ETFs, though. They're designed to do what they do over a one-day time frame. If you hold longer, continual monitoring and adjustment is mandatory. If you don't mind your leveraged and inverse ETFs properly, returns may wander in unexpected directions. A quick reminder of why you don't want to hold for an extended period can be found in the Horizons BetaPro S&P 500 Bull Plus ETF, which lost 0.4 per cent for the 12 months to Feb. 29. The S&P 500 index made 6.5 per cent over that period in Canadian dollar terms.

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LEVERED/INVERSE ETFS SORTED BY MER

FundTickerMER (%)InceptionLeverage FactorCategory2 Year Annual Return to Feb. 29 (%)1 Year Annual Return to Feb. 29 (%)
Horizons BetaPro US 30-yr Bond Bull Plus ETF HTU-T 1.4125-Jun-082Levered Fixed Income27.646.2
Horizons BetaPro NYMEX Natural Gas Inverse ETF HIN-T 1.404-Feb-10-1Inverse Commodity54.475.1
Horizons BetaPro NYMEX Natural Gas Bull Plus ETF HNU-T 1.4016-Jan-082Levered Commodity-74.8-79.9
Horizons BetaPro US Dollar Bear Plus ETF HDD-T 1.3926-Jun-08-2Levered Inverse Currency3.5-5.4
Horizons BetaPro S&P/TSX Glbl. Base Metals Bull Plus HMU-T 1.3923-Jan-082Levered Equity-12.6-50.2
Horizons BetaPro S&P/TSX Capped Energy Bear Plus HED-T 1.3919-Jun-07-2Levered Inverse Equity-20.920.3
Horizons Betapro S&P 500 VIX Short Term Fut. Bull Plus HVU-T 1.3916-Dec-102Volatilityn/a-58.9
Horizons BetaPro S&P/TSX Glbl. Gold Bear Plus ETF HGD-T 1.3926-Jun-07-2Levered Inverse Equity-32.1-13.7
Horizons BetaPro S&P/TSX Capped Energy Inverse HIE-T 1.3811-Mar-09-1Inverse Equity-9.013.5
Horizons BetaPro S&P/TSX Global Gold Inverse ETF HIG-T 1.3811-Mar-09-1Inverse Equity-14.0-2.3
Horizons BetaPro NYMEX Crude Oil Inverse ETF HIO-T 1.384-Feb-10-1Inverse Commodity-10.7-13.9
Horizons BetaPro S&P/TSX Capped Fincl. Inverse HIF-T 1.389-Mar-09-1Inverse Equity-7.51.8
Horizons BetaPro US 30-yr Bond Bear Plus ETF HTD-T 1.3825-Jun-08-2Levered Inverse Fixed Inc.-27.4-36.7
Horizons BetaPro MSCI Emerging Markets Bear Plus HJD-T 1.389-Jul-08-2Levered Inverse Equity-31.7-22.2
Horizons BetaPro MSCI Emerging Markets Bull Plus HJU-T 1.389-Jul-082Levered Equity1.6-18.0
Horizons BetaPro S&P 500 Inverse ETF HIU-T 1.384-Feb-10-1Inverse Equity-15.2-9.3
Horizons BetaPro S&P/TSX Glbl. Base Metals Bear Plus HMD-T 1.3823-Jan-08-2Levered Inverse Equity-31.18.5
Horizons BetaPro S&P/TSX Capped Fincl. Bull Plus HFU-T 1.3812-Jun-072Levered Equity4.4-14.7
Horizons BetaPro S&P/TSX Capped Fincl. Bear Plus ETF HFD-T 1.3812-Jun-07-2Levered Inverse Equity-15.91.0
Horizons BetaPro COMEX Gold Bullion Bear Plus ETF HBD-T 1.3823-Jan-08-2Levered Inverse Commod.-40.6-40.3
Horizons BetaPro COMEX Gold Bullion Bull Plus ETF HBU-T 1.3823-Jan-082Levered Commodity41.134.4
Horizons BetaPro NASDAQ-100 Bear Plus ETF HQD-T 1.3818-Jun-08-2Levered Inverse Equity-39.7-32.2
Horizons BetaPro S&P/TSX Capped Energy Bull Plus HEU-T 1.3819-Jun-072Levered Equity-2.1-40.7
Horizons BetaPro S&P 500 Bull Plus ETF HSU-T 1.3818-Jun-082Levered Equity17.7-0.4
Source: National Bank Financial, Bloomberg

© 2007 The Globe and Mail. All rights reserved.

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