Double Your Market Exposure with Horizons BetaPro ETFs

A reader asked about the Horizons Betapro (leveraged) ETFs in a comment thread and I thought that it would make an interesting post as these ETFs have huge return and loss potential.

What are the Horizons Betapro ETFs?

They are ETF’s that double the exposure of the underlying index via built-in leveraging. Double the exposure means that the investor can potentially reap double the gains of the index OR double the loss.

Along with leveraging, their selection of ETFs can bet on both directions of a particular index. For example, HXU leverages the S&P/TSX index to the upside. HXD, on the other hand, leverages the downside. In other words, buying HXD is the same as shorting the market without needing margin in your account.

Obviously, these ETFs are meant for the investor with high risk tolerance.

Which Indexes are Covered?

There are a limited number of leveraged index ETFs offered by Horizons BetaPro ETFs. Among them include:

Index Covered Ticker MER
S&P/TSX Bull/Bear HXU/HXD 1.15%
S&P/TSX Capped Financials Bull/Bear HFU/HFD 1.15%
S&P/TSX Capped Energy Bull/Bear HEU/HED 1.15%
S&P/TSX Global Gold Bull/Bear HGU/HGD 1.15%
S&P/TSX Global Mining Bull/Bear HMU/HMD 1.15%
Gold Bullion Bull/Bear HBU/HBD 1.15%
NYMEX Crude Oil Bull/Bear HOU/HOD 1.15%
NYMEX Natural Gas Bull/Bear HNU/HND 1.15%
DJ-AIG Agricultural Grains Bull/Bear HAU/HAD 1.15%
US Dollar Bull/Bear HDU/HDD 1.15%

Performance

As the Horizons BetaPro ETFs are less than 2 years old (started at beginning of 2007), it’s difficult to get a real appreciation for their track record. However, since HXU started close to Feb 2007, XIU has gained a total of 17% and HXU 26%. It’s not double, but a significant increase in gains.

Taking a closer look:

  • The big 10-12% market drop at the beginning of 2008 resulted in a >20% drop in HXU. From there the market recovered a bit.
  • From the low in mid-March to the end of the chart, XIU (Canadian index) gained approximately 17%. HXU on the other hand gained about 30%.

HXD is the opposite of HXU where it appreciates when the markets go down. HXD may be useful for those who want to reduce volatility in their portfolio as it has double downside protection.

Final Thoughts

As mentioned earlier, these ETFs are not for the faint of heart as they are extremely volatile. However, as the markets have proven to keep going up over the long term, I think that the double exposure market index ETFs could be a winner for those who can stomach the price swings.

I wonder if HXU would be a lucrative long term pick for my Smith Manoeuvre portfolio?

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Frugal Trader

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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rob
11 years ago

hi Quibikal,

ref quote 11

“Basically, you’re taking 2X the risk, but not getting 2X the return.”
if the sequence of the 2 transactions are altered would we then not get more than 2x the return

rob
11 years ago

useful link on horizon betapro

http://www.hbpetfs.com/pdf/20090908_dh.pdf

rob
11 years ago

useful link on horizon betapro

WhereDoesAllMyMoneyGo.com
12 years ago

Futures contract sizes (while margin requirements may be manageable) are very large. By depositing the minimum margin requirements on index futures, you could subject yourself to 20x leverage very easily (this will vary up or down depending on the margin requirements). Futures are marked-to-market which means gains and losses are credited/debited to your account and if you are on the losing side early you could be below the maintenance margin requirement, which means you have to top up to the original amount of margin required.

Also, there is no rule that you have to deposit the minimum margin amount, you could actually deposit the full amount and have a 1:1 relationship. For a 2x leverage, you would deposit 50% of the contract value as your margin deposit.

So to replicate 2x leverage, you would need a deposit of $50,000 for most minimum contract sizes. In other words, this is not manageable for many investors due to scale.

p.s. Thanks for the link Millionaireby45!

Taddy
12 years ago

There is something fishy here. There si no way these could double the performance of the market index over the long term.

Dividend Growth Investor
12 years ago

FT,

I was actually referring to the fact that those type of leveraged ETF’s use stock index futures in order to gain twice the daily exposure to the market. I was simply asking if it won’t be cheaper to simply do the trading yourself. This way you could actually try to achieve double (or some other multiple) the stock index performance for one quarter ( most stock index futures expire quarterly).
Doing this thing, you only have to put about 10% down for one E-mini S&P 500 futures contract ($5-$7K) and you will participate fully in the gains/losses of the index. You won’t get any dividends, but you will be getting interest payments from the money you put at your broker as collateral.
I know i need to research futures a little bit more, but in my opinion purchasing a futures contract could be something like buying a house -the only difference is that there is a settling price each day and if you are short on margin you need to put up more money.
So if the S&P 500 e-mini contract costs $70,000 ( say 1400 times 50), and you only have $10,000 to invest now, instead of purchasing $10,000 worth of an S&P 500 mutual fund or etf, just buy one futures contract, participate in the gains/losses and keep on adding to the account.

In terms of leverage however I wanted to mention that Doubling the daily exposure really works out very well in a bull market., but could kill you in a bear market.

paul s
12 years ago

two thoughts:

1) Using these for Smith Man. is a bad idea IMO. Borrowing money to invest is risky enough, let alone doubling your risk. Personally any leveraged investments need some root in solid income and dividends that are going to pay in addiiton to “bonus” capital gains.

2) Regarding portfolio risk/hedging. If I had a million $ and wanted to preserve capital and receive routine dividends to live off of, I would buy a portfolio of good dividend stock that has a history of growing dividends over time, then I would take some of the money and invest in a bearx2 fund that would preserve my capital. I could NEVER lose the initial capital in theory, but could always get the dividends. You can figure out the %ages that would work.

Millionaireby45
12 years ago

Qubikal,

I would like to make an apology. After doing a bit more research, I found that the way I calculated the returns is incorrect. The ETF’s track the DAILY performance and the built-in levering resets every day. Therefore , the example that you provided is correct. For a detailed explanation refer to the following website: http://www.wheredoesallmymoneygo.com/double-exposure-exchange-traded-funds/

Because of this, it is possible to have greater than double the return of the index or less than double the return of the index. Your total return has a lot more to do with the daily fluctuations than the overall yearly performance.

Cheers,

Millionaireby45

Patrick
12 years ago

I don’t buy it. There’s something fishy here. There’s no way these could double the performance of the market index over the long term. If that were true, I could start a company, take it public, and invest all the IPO proceeds in this fund. My company’s assets would grow at twice the rate of the index. Eventually, inevitably, my company’s market cap would be so big that it would dominate the index. At that point, the index essentially is tracking my company, and my company must now be growing at twice the rate of itself.

This is a thought experiment. It’s not to be taken literally, but the point is that a fund earning double the index over the long run is a paradox.

Millionaireby45
12 years ago

Qubikal,

I think your Math may be incorrect.

Let me try and walk through an example using the percentages that you used.

Assume you invest $10,000 in the ETF. Since you get double the exposure, it is the same as investing $20,000. Now after day 1, the market decreases by 5%. If you invested simply the $10,000 in the market, your total after day 1 is now $9500. With the ETF, your total is $9000 ($10,000-($20,000-$20,000*0.95)) or -10%. Now assume that the market increases by 3% in day 2. Money invested in the market is now worth $9785 ($9500*1.03). The total index decreased by 2.15% as you stated above. However with the ETF, your total is $9540 ($10,000-($20,000-$20,000*0.95*1.03)). The ETF decreased by 4.3% or double not the 4.6% that you stated in your comments. Sorry if this is confusing.

There are two main reasons why the ETF isn’t exactly double the index.

1) The MER.
2) Often these ETF’s do not match the index 100%. For example, back in 2001 Nortel made up approximately 40% of the TSX. The ETF tracking the index may have a maximum weighting for any one stock. If the maximum is less than 40% than the ETF will not match the index exactly. I do not know for sure if this is the case with regards to the Horizon ETF’s, but it is something that should be investigated before investing in them.

Cheers,

Millionaireby45