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Mutual Funds and Exchange-Traded Funds

Sam and Sasha go for gold Add to ...

After the price of a gold surges up to $1,000, two brothers — Sam and Sasha — sense an investment opportunity. Where will prices move next?

Sam, the optimist, looks for the upside. He invests $1,000 in a two-times leveraged bull ETF.  This fund aims to double triple the daily return of a gold-mining index.

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Assuming gold will drop, Sasha buys $1,000 in units of the related leveraged bear ETF. This fund seeks to deliver double the gains if the gold-mining index drops. Who is right?

The next day the gold moves up 10% to $1,100. The gold-mining index makes a similar jump. That means Sam bull ETF runs up to $1,200, while Sasha’s bear fund falls to $800.

Another day goes by and gold settles back to $1,000 — a 9.1 percent drop. So does the gold-mining index. To double that move, Sam’s bull fund sinks to $982. Sasha’s bear fund rises to $946.

The result: gold is the same price it was two days ago. So is the gold-mining index. Yet both brothers have lost money even before fees and transaction costs.(This example is for illustration purposes only. To learn more, consult a knowledgeable adviser.)

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

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