Playing the Derivative Market while Minimizing Risk

Using Morningstar’s ETF finder, Choose Alternative from the drop down list under Global Broad Category.

From there, you will get a list of ETFs that are leveraged (magnifies the gains or losses by 2x), Bull (securities going up), Bear, (securities going down), inverse (goes in opposite direction of the securities tracked).

The advantage of using derivative ETFs is that the losses are limited to the money you invested in the ETF.  When it comes to derivatives, if the price goes in the opposite direction of your bet, you will have to have enough money to cover the rising cost of the bet.  Furthermore, without understanding the derivatives market, your losses can leave you bankrupt.  Therefore, derivative ETFs are a good choice for people wanting to magnify his/her gains if he/she thinks the market is heading in a specific direction.  He/she will have to determine when to sell the derivative ETF since it is designed for short-term investors.

HFU.TO doubles the gains of the S&P/TSX CAPPED FINANCIALS index.  The MER is 2.18%/year as written in the fund summary.  So, there is a higher cost to try to double your gains.

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What is an inverse ETF

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