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:

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.

Interested in doing a little technical analysis on these leveraged ETFs?  Here’s the free trend analysis tool that I use.  Simply enter the stock symbol and they will email you a printed report.

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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A few readers have emailed me regarding the basics of buying and selling of individual stock along with the accompanied terminology. Even though I’m not a stock trading pro, I have a good few years experience in buying/selling individual stocks so I feel comfortable explaining the basics.

Here are the steps involved:

1. Sign up with a discount brokerage

I have written a discount brokerage comparison that indicates the various costs involved with each broker. I personally prefer to keep my trading costs as low as possible. Trading, maintenance and foreign exchange (FOREX) fees should be accounted for when evaluating how much a brokerage will cost over time. All the brokers listed in the comparison are insured by CIPF (up to $1 million of the trading account is insured).

2. Fund the Account

To fund the trading account, most discount brokerages allow funding via cheque, account transfer and EFT/bill payment from any online banking account. I personally use EFT as I find it the most convenient. After the account is open and funded, the ability to buy/sell stocks in the supported markets should be now available. Some brokerages, like Interactive Brokers, have access to most major public markets in the world.

3. Getting Quotes

After the account is opened, hopefully you’ve already determined which stocks that you are interested in buying. Before buying however, the most recent trading prices must be determined. To do this, enter into the quoting section of the interface which will display last price, bid, ask and volume.

• Last price: The last price at which the stock traded.
• Bid: The current highest price per share that a buyer is willing to pay.
• Ask: The lowest asking price per share that a share holder is willing to sell for.
• Volume: The number of shares traded during the day.

4. Start Trading

After getting the real time quote of the potential security to purchase or sell, there will most likely be a “trade” button behind which there will be bunch of form fields to fill in to place an order.

Below is a screen shot of the trading page from my Questrade WebTrader account:

Simply fill in the fields indicated and hit the “preview order” button. That will bring the account to a trade confirmation page to ensure that the correct information was entered.

What do all those fields mean? Glad you asked! I have explained them in the next step.

5. Trading Terminology

If you are anything like me the first time trading, you’ll have no idea what all the form fields mean on the trading page.

Security - This is the stock symbol of the company to be potentially purchased/sold. Some brokerages like Questrade will require an abbreviation of the market after the symbol (ie: RIM.TO). Others, like CIBC Investors Edge, will only require the symbol with the market location chosen afterwards in a drop down box.

Order Type - For basic discount brokerages, there are typically 3 types of orders, Market, Limit and Stop.

• Market Order: When a BUY market order is placed, the ask price is paid, kinda like the “buy it now” button on eBay. Chances are that the order will get filled immediately but often at a higher price than the “last price”. If a SELL market order is placed, the same happens except the shares are sold at the bid price.
• Limit Order: A limit order is where the price is specified in which to buy/sell the stock to avoid any surprises. The downside is waiting until a buyer/seller hits the limit price which may or may not happen.
• Stop: This is a little more advanced where the stop price is set for either buying or selling. For example, a stop loss sell order is set to minimize the loss that a trader is willing to take. When the stop price is reached, a market order is sent out at that price. There are also variations to stops such as stop limit orders and various types of trailing stops. These are out of the scope of this article, but I may get into them another time.

Quantity - The number of shares to purchase/sell.

Price - If a limit order is selected, this is the price at which the stock will be purchased/sold IF the market reaches the limit price.

Duration - This is the duration that the order will remain open if not executed immediately. Day will keep the order open until the end of the trading day and Good Till Canceled (GTC) will remain open until manually canceled.

Preferred ECN - Most of the bank brokerages do not allow ECN to be chosen. Even if they do, I always leave it on auto. Brokerages like Interactive Brokers will charge extra if the Auto/Smart ECN routing isn’t selected.

This concludes the very basics of buying/selling stock with an online discount brokerage. If you have any questions, or anything to add, please leave them in the comments.

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Some highlighted articles from The Money Writers this week:

Lazy Man and Money asks Have You Decided To Be Rich?.

The Digerati Life has written about how some Japanese housewives have turned to day trading to cure their boredom in the article “Making Money Through Day Trading: The Secret Lives of Stay-At-Home Mommy Speculators.”

Generation X Finance teaches us How to Get the Most for Your Home When it is Time to Sell by Making a Good Impression.

The Sun’s Financial Diary gives us the Mutual Fund Basics: How to Use Morningstar to Research Funds.

Money Smart Life shows us how to Save Money When Buying a Diamond Ring & Avoid Going into Jewelry Debt.

Brip Blap has a great article “associating with the ‘appear-to-be-rich’ folks,” about those who pretend to be wealthy and those are really are.

My Dollar Plan explains how they sold their car for top dollar in the article “We Sold My Car! What Worked and What Didn’t.”

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