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Number Cruncher

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Number Cruncher

Inverse and leveraged ETFs: Tread carefully Add to ...

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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