Thursday, February 23, 2006

Augment your returns with levered stocks and investments

There's more than one way to enhance your long-term investment results than borrowing money from the bank to buy stocks as I've written favorably about recently. There's also some opportunity - at least here in Canada - to buy stocks or investments which THEMSELVES are levered on an underlying company or index.

They therefore magnify the potential gains (but also losses too) that can be had compared to the underlying stock or index. For instance, Scotia Managed Companies offer a number of "split share" companies that use another index or company to magnify the returns. Some of the ones they offer include one which uses the S&P500 Health Index as its basis, but it offers leverage at a 3.22 factor against the underlying index. Which wouldn't have been good for your portfolio over the past several years, as that index slid, and the sliding has been magnified by this leverage factor.

On the other hand, they also offered split shares on the TSX 60 benchmark - which would have been fabulous for your portfolio recently, given the 1.79 factor leverage on an index that's been on fire the past few years. They also offer narrow (company specific) or more broadly based split shares, such as ones that highlight the Canadian banks or banking sector, life insurance companies, utility companies, as well as other sectors. There's also the shares that lever on the trophy property and asset manager, Brookfield Asset Management company through BNN Investments at about 3x leverage.

One thing I like about many of the levered investments discussed here, is that they are on staid, conservative companies. In this way, I can get some of the returns offered by smaller companies, but without so many of the risks inherent in them.

Finally, there's even mutual funds offered by Horizon Beta Pro Funds that offer 2x upward OR downward leverage.

For more on the whole split share structure, go and read this article by the Money Sense people. For an investor with a long enough time horizon to ignore the inherent volatility in this type of investment, I say definitely take a look at these types of investments.


PS If anyone knows of any levered US market investments please drop a comment here, or send me an email. I'll pass it on.

The Confused Capitalist

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