Investors hanging on to leveraged ETFs for too long can suffer unexpectedly sharp losses.Natali_Mis/iStockPhoto / Getty Images
The newest thing in exchange-traded funds is an expensive rocket ship for day traders that amps up returns to three times the daily performance of various stock indexes and sectors.
Can you get further away from the original ETF mission of providing mainstream investors with a cheap, simple investing alternative to high-cost mutual funds? Theoretically, yes. There is a quadruple leveraged ETF-type product in the United States, but for now you won’t see anything similar in Canada.
A total of 11 triple-leveraged funds were listed for trading last month by LongPoint ETFs, and four more are to be listed Tuesday by Global X under the BetaPro name.
Consider these ETFs a tool for hitting that not-so-sweet spot where aggressive investing meets gambling, and as a reflection of today’s fast-expanding ETF universe. To make their mark in a crowded marketplace, some ETF companies offer products that have no place in the portfolios of investors trying to grow their tax-free savings and retirement accounts.
Leveraged ETFs are a prime example. The ideal holding period for these funds is 24 hours, max. Keep them for longer periods and they can deliver unexpectedly sharp losses.
The Globe and Mail 2025 ETF Buyer’s Guide, Vol. 6 – Asset Allocation ETFs
Leveraged ETFs use financial instruments called derivatives to provide returns magnifying the daily performance of the underlying holdings, typically a stock index such as the S&P 500 or a sector such as semiconductors or banks. You typically get 1.25, two or three times the gains or losses of the underlying index or stocks in a leveraged ETF.
A triple-leveraged ETF would rise 3 per cent if the underlying investments gained 1 per cent in a day, and lose 3 per cent if those investments lost 1 per cent. A variation on these funds gives you similar magnification of inverse returns. You win if markets fall and lose if they rise.
Leveraged ETFs came to Canada 18 years ago in a double-leverage flavour that left unprepared investors feeling shocked in a bad way about their results over longer periods of time. In some cases, investors found their losses far exceeded the underlying indexes or sectors.
The furor eventually subsided, but getting triple-leveraged ETFs approved by regulators wasn’t easy. “Initially, regulators said, ‘no way, not a chance,’” said Steve Hawkins, CEO of LongPoint ETFs.
Mr. Hawkins won the day in large part by quoting a report showing that Canadian investors already held more than $2.5-billion in U.S.-listed triple-leverage ETFs. Introducing Canadian versions of these funds allows for domestic regulatory oversight and for economic benefits to flow into Canada rather than the U.S.
Regulators worried about the risk of triple-leveraged ETFs being used by unsophisticated investors who didn’t understand what they were buying, Mr. Hawkins said.
“But knowledgeable, sophisticated, active investors are really our target for these products,” he said. To back this up, LongPoint will be working with regulators and brokers to see if they can develop a warning – “almost like a cigarette disclaimer label” – when investors place an order to buy these ETFs.
Growth in overall ETF assets has been phenomenal in recent years, with total assets rising by almost 33 per cent in the past year or so to $572-billion. The best ETFs for most investors are ultra low-cost funds tracking widely followed stock and bond indexes.
Investor commitment to this type of ETF can be seen in the fact that the four largest ETFs listed on the TSX follow the S&P 500 and the S&P/TSX Composite and S&P/TSX 60 indexes. These four funds alone have close to $70-billion in assets, compared to about $1.5-billion for speculator-focused leveraged ETFs listed on Canadian exchanges.
“Passive, ultra low-cost ETFs are still growing at the same rapid rate they always were,” said Daniel Straus, managing director of ETFs and financial products research at National Bank of Canada Financial Markets. “I would say we now have something of a dual narrative – the expansion of the ETF industry to encompass more risky assets in parallel with the same story that was there before.”
Risk isn’t the only differentiator between core index-tracking funds and risky leveraged products. While the management expense ratio for big index trackers can be as low as 0.05 per cent, the cost of owning the LongPoint triple-leverage products will be mutual fund-like at a little north of 1.55 per cent.
“These are the highest fee products in the U.S., and these are going to be the highest fee products in Canada as well,” Mr. Hawkins said. “A lot goes into them.”
The BetaPro triple-leveraged funds compete hard on cost – their MER will come in a bit higher than 0.65 per cent for the duration of the year thanks to a rebate of 0.5 of a point.
A sign of the popularity of ETFs today is the firehose flow of new products. Beyond triple-leveraged funds, recent offerings include index trackers, funds for holding cash, crypto funds and enhanced income funds.
Mr. Hawkins sees triple-leveraged ETFs having a moment right now because of the extreme market volatility caused by trade war developments. “These ETFs are built for volatility and giving short-term, high-conviction traders an opportunity to capitalize,” he said.
Everyone else, please try a simple, low-cost index ETF such as the ones covered in the 2025 Globe and Mail ETF Buyer’s Guide.
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