Index funds vs ETFs with leverage [Netherlands]

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unicornrainbowz
Posts: 1
Joined: Sun Jul 16, 2017 11:20 am

Index funds vs ETFs with leverage [Netherlands]

Postby unicornrainbowz » Sun Jul 16, 2017 11:34 am

Hello Bogleheads,

First of all I would like to note that I am still very new to investing, and this is actually my first post on this forum. I started about two months ago, by doing something that I probably should not have done, which is make an account on markets.com and immediately put my real money on it, and buy some stocks. But my next step was to just read as many books as I could to learn as much as I could. The first book I've read was 'Millionaire Teacher' by Andrew Hallam. He explained to me all about index funds and how they could help me become financially stable in the future. After reading that book I started reading 'The Little Book of Common Sense Investing' by John Bogle. And in this book he's really given me a different perspective on investing. He comes across so convincingly. But me, being as young as I am, do not have the minimum amount of money required to start investing in index funds (I'd like to add that I live in The Netherlands), so what I did find out was that via markets.com I am able to buy ETFs, like SPY. On that website, for the SPY ETF, there's a leverage of 1:100, which would allow me to 'buy' (or 'borrow', kinda) a lot more of this ETF, than without the leverage. I might be wrong, but I don't think the same goes for passive index fund investing. So my question was, if I would be wrong to think that buying and holding ETFs on my markets.com account would be the smarter move (as long as I watch out for the higher risk) than to invest my money on an index fund website.

I hope there wasn't too much cringing involved with reading this. :wink:

Valuethinker
Posts: 32032
Joined: Fri May 11, 2007 11:07 am

Re: Index funds vs ETFs with leverage [Netherlands]

Postby Valuethinker » Sun Jul 16, 2017 12:34 pm

unicornrainbowz wrote:Hello Bogleheads,

First of all I would like to note that I am still very new to investing, and this is actually my first post on this forum. I started about two months ago, by doing something that I probably should not have done, which is make an account on markets.com and immediately put my real money on it, and buy some stocks. But my next step was to just read as many books as I could to learn as much as I could. The first book I've read was 'Millionaire Teacher' by Andrew Hallam. He explained to me all about index funds and how they could help me become financially stable in the future. After reading that book I started reading 'The Little Book of Common Sense Investing' by John Bogle. And in this book he's really given me a different perspective on investing. He comes across so convincingly. But me, being as young as I am, do not have the minimum amount of money required to start investing in index funds (I'd like to add that I live in The Netherlands), so what I did find out was that via markets.com I am able to buy ETFs, like SPY. On that website, for the SPY ETF, there's a leverage of 1:100, which would allow me to 'buy' (or 'borrow', kinda) a lot more of this ETF, than without the leverage. I might be wrong, but I don't think the same goes for passive index fund investing. So my question was, if I would be wrong to think that buying and holding ETFs on my markets.com account would be the smarter move (as long as I watch out for the higher risk) than to invest my money on an index fund website.

I hope there wasn't too much cringing involved with reading this. :wink:


On this forum and many others there are warnings about the dangers of investor leverage. I don't know where this 100:1 leverage comes from?

I can't really say much more than to say: don't do this. The volatility of markets will wipe out leveraged investors on the downside. Even if markets go up in the long run, in the short run the downward volatility is large enough, and frequent enough, to wipe out investors. This is why Spread Betting companies are always advertising for new clients-- their old clients have lost too much money and had their accounts closed (managing credit risk is important in Spread Betting companies)-- that's why they spend all that money advertising to a (male, young) audience at football matches. In the jargon of finance the margin provider (who gives the leverage) is "long volatility" and the margin taker (the investor) is "short volatility". So volatility will wipe out the margin taker, even if he/she is right in the long run as to the market's direction.

Leveraged ETFs don't give the risk-return profile people imagine that they do. And, indeed, if you read the Prospectuses closely enough, they tell you that.

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BeBH65
Posts: 803
Joined: Sat Jul 04, 2015 7:28 am

Re: Index funds vs ETFs with leverage [Netherlands]

Postby BeBH65 » Sun Jul 16, 2017 12:58 pm

Hello Unicorn,

Please read this thread for a real life account of one of the forummembers on the use of leveraging. In short, don't invest with borrowed money, don't use a margin account, don't use leveraged funds.

SPY is a passive index fund.
That said, I presume that the SPY fund you have bought is not leveraged.
Can you give us the ISIN code of the fund? and the information on the actual transaction: date, #shares, price paid.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

acanthurus
Posts: 182
Joined: Sun Aug 04, 2013 8:02 am

Re: Index funds vs ETFs with leverage [Netherlands]

Postby acanthurus » Sun Jul 16, 2017 1:00 pm

Valuethinker wrote:On this forum and many others there are warnings about the dangers of investor leverage. I don't know where this 100:1 leverage comes from?

I can't really say much more than to say: don't do this. The volatility of markets will wipe out leveraged investors on the downside. Even if markets go up in the long run, in the short run the downward volatility is large enough, and frequent enough, to wipe out investors. This is why Spread Betting companies are always advertising for new clients-- their old clients have lost too much money and had their accounts closed (managing credit risk is important in Spread Betting companies)-- that's why they spend all that money advertising to a (male, young) audience at football matches. In the jargon of finance the margin provider (who gives the leverage) is "long volatility" and the margin taker (the investor) is "short volatility". So volatility will wipe out the margin taker, even if he/she is right in the long run as to the market's direction.

Leveraged ETFs don't give the risk-return profile people imagine that they do. And, indeed, if you read the Prospectuses closely enough, they tell you that.


100:1 probably comes from CFDs on the underlying. CFDs were banned in the US in 2010. Places like markets.com exist to fleece their customers.

I am much more friendly to the use of leverage in portfolios than most here, but things like this are just giving your money away to a sham broker. 100:1 leverage and one down day and you're out.


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