I’ve got a bit of money to throw into my TFSA, and for the amount ($1000) I’m thinking a pretty passive strategy for 2013. Either into a leveraged S&P fund (2x S&P’s return) or a leveraged energy fund (2x a portfolio of large canadian oil companies like Suncor, Husky, Cenovus, etc).
I’m pretty bullish on both, and energy had a relatively bad year in 2012 which makes me wonder if it might have a higher upside in 2013. Thoughts?
I’m looking at one of Horizon’s ETF’s, HSU & HEU. I’d do both but then commisions will be too high.
Why do you say that? (I’m looking at a one year holding period)
I briefly considered options too, but honestly have no idea where to start - never traded them before. But leveraging a 3x does sound awful fun lol. What would the strategy there be?
Edit: can you get options on ETF’s? My investing account is telling me HSU is an invalid symbol
Yeah, extra volatility will eat away at your returns. You won’t make 3x if the market goes up and you’ll most likely lose more than 3x if the market goes down.
Holy carp! I never thought about that. Balls to the wall indeed!
I’d need to go back and analyze that, but I suspect that these are highly correlated enough that they are more or less the same bet. Oil is more levered, S&P is more diversified. I’d say that decision would depend on your opinion about a Chinese recovery (and a European recovery, to a lesser extent), as well as middle eastern politics.
Yes, there are options on ETFs. However, liquidity depends on the name. For instance, SPY is super liquid. Some random “Horizon” ETF probably does not have liquid options.
Most highly liquid leveraged ETFs have options available. It’s a wild ride though (I snagged about 115% in one day). You may have trading restrictions based on your account type. I can’t trade options (except for covered calls) in my 401k for example.
As for why you don’t want to hold leveraged ETFs, they suffer from volatility decay. Google it to learn more, but it’s easily illustrated by simply looking at a chart like this:
Both TNA and TZA are highly liquid, but over time they’re both pretty much gauranteed to lose money if you hold on to them. They’ll lose both on an absolute basis and relative to their underlying index/asset. Volatility is the main culprit. Trading costs are another. The turnover in those ETFs is mindblowing. They have to do a lot of work behind the scenes to achieve their daily target of 2-3x the underlying.
Leveraged ETFs are really just a sucker’s bet. The only way you’ll make money if you hold on to them for a long period of time is if the underlying moves straight up (or down if it’s a bear ETF). Volatility will cripple you.
Ahh I gotcha, so the doubled leverage isn’t perfect in either direction. The money was “seed money”, to learn with basically, so pardon my ignorance.
So a better idea would be to buy calls on a company or lev’d fund I think should go up… Any tips on how to pick my strike price and expiration date, and when to exit my positions?
$1000 is awfully tight for seed money. It will buy you about 7 shares of SPY, 6 of GLD, or 1 share of Google. It’s going to be hard to diversify or be sensible with position sizes with that amount.
About the only thing you can do is learn how to execute a trade and answer account questionnaries, which - while not completely useless - is presumably not what you are trying to learn.
Most traders say you need at least $40k to have a chance of avoiding being wiped out, and even this amount is iffy. Less than that, you either have to assume too much risk and risk blowing your portfolio out of the water on one or two bad calls, or - if you are sensible about risk - you then can’t earn enough return to overcome transaction costs.
Remember, buying options can feel like they are safer than stocks because they have a floor on the maximum loss, but if they expire OTM, you lose 100% of their value. Stocks - particularly indexes - seldom if ever go to zero (basically they go to zero with revolution or losing a war), so options are more risky, because the chance of losing everything is higher.
If I can beat the 7.5% I pay on my student loans I’ll be happy lol. The money was given explicitly for this purpose though, so even if I do lose it it’s not the end of the world.
Yeah, but what good is $75 going to do you? I get it’s a learning experience and all, but by this time next year when you look at your account balance and it says $1,075 are you really going to thrilled?
Swing for the fences. Or better yet take a few buddies to Capital Grille and have a good time.
Edit: What the hell is wrong with the formatting? Can anyone else see that? That bizarre bold cursive font is popping up all over this site.
Yeah my thoughts exactly, if I can make the 7.5% I’ll have done better than by putting it towards the loan but thats all (not counting for commisions of course) so your options/leverage idea caught my attention
I wouldn’t really recommend options since you have to both call the direction and timing correct. It’s more difficult. Sure it’s fun to see those 100% gains, but you’re also likely so see some big % losses (I’ve had both) that you are less likely to see with stocks.
If you have credit card debt with an interest rate above 10 percent, I would advise paying off that debt and making sure you continue to pay yourself back at the same interest rate.
If you have such a small amount of money, the most efficient way to make high returns is to self-refinance high interest debt.
Yeah I’ve thought about that, but I don’t carry a balance on cc’s and 7.5% is my highest cost of debt. It’s such a small amount that I’ve decided it isn’t even worth putting into any debt either, and I really need to get something going in my tfsa
The Tax-Free Savings Account (TFSA) is a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
How the Tax-Free Savings Account Works
As of January 1, 2013, Canadian residents, age 18 and older, can contribute up to 5,500 annually to a TFSA. This is an increase from the annual contribution limit of 5,000 for 2009 through 2012 and reflects indexation to inflation.
Investment income earned in a TFSA is tax-free.
Withdrawals from a TFSA are tax-free.
Unused TFSA contribution room is carried forward and accumulates in future years.
Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
Contributions are not tax-deductible.
Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
TFSA assets can generally be transferred to a spouse or common-law partner upon death.
I recommend deep in the money call options if you want to hold a leveraged position for 1 year, especially for a retirement account where margin is normally not allowed. Time decay is almost non existent.
It’s not a retirement account (although I’ll probably use it as that eventually), I can’t do margin at this point though as I need to post $5000 before I can short anything. So for now I can only do long postions in equities and options. The more I think about it the more I think I’ll just throw it into SPY and forget about it though… Just don’t have the experience to get into options. I’ve heard people forecasting 12% for the S&P over '13 which isn’t bad for free money anyway.
I was just doing some more research and I’m no expert but that HSU leveraged S&P did outperform the S&P and SPY in 2012 as a holding investment, up about 24% vs the others 12%
So theoretically if 2013 is a decent year, HSU could work as a holding investment… I’m pretty sure I’m just gonna take a gamble on some options anyway, but thought that was interesting.