XEQT vs Leveraged ETFs in Canada: Why 2x and 3x Products Destroy Portfolios

I’ll be honest with you: I spent about three weeks convinced that a 2x leveraged ETF was going to make me rich.

It was during a stretch in 2022 when everything was bouncing. The market would drop hard one week, rip back the next. A friend in a finance Discord kept posting his daily gains on HQU — Horizons BetaPro NASDAQ-100 2x Daily Bull ETF — and the numbers looked incredible. On a green day, he was up 4%, 6%, sometimes more. Meanwhile my boring XEQT sat there doing its slow, steady thing.

I almost pulled the trigger. I had my Wealthsimple account open, the order screen ready. Then I sat down and actually did the math.

What I found stopped me cold. And I want to walk you through exactly what I found, because it’s one of the most important things any Canadian retail investor can understand before they touch a leveraged product.

Spoiler: XEQT won. It wasn’t even close.

1. What Are Leveraged ETFs, Exactly?

Leveraged ETFs are exchange-traded funds that use financial derivatives — swaps, futures contracts, and sometimes borrowed money — to deliver a multiple of an index’s daily return. A 2x leveraged ETF on the S&P 500 aims to return +2% for every +1% the S&P 500 gains in a single day. A 3x ETF tries to give you three times the daily move.

The key word there is daily.

These are not “buy and hold” products. They are designed to reset every single trading day. That daily reset is the mechanism that makes them useful for short-term traders and absolutely lethal for long-term investors.

In Canada, the most commonly traded leveraged ETFs are issued by Horizons (now Brompton) and are structured as total return swaps:

• HQU — BetaPro NASDAQ-100 2x Daily Bull ETF
• HXU — BetaPro S&P/TSX 60 2x Daily Bull ETF
• HSU — BetaPro S&P 500 2x Daily Bull ETF
• HXUU — BetaPro S&P 500 3x Daily Bull ETF (for those who want to lose money faster)

These trade on the TSX, which means any Canadian with a brokerage account can buy them. That accessibility, combined with the promise of amplified returns, makes them dangerously appealing.

2. The Daily Reset Problem: How Compounding Becomes Your Enemy

Here’s the core mechanic you need to understand before anything else.

In a normal index fund like XEQT, your returns compound in the traditional sense. If the market goes up 10% this year and down 5% next year, your portfolio compounds those returns sequentially. Over time, compound growth works in your favour.

In a 2x leveraged ETF, the compounding still happens — but it happens on the leveraged daily return, not the underlying index return. And when markets are volatile, this creates a phenomenon called volatility decay (also called beta slippage or path dependency).

Let me show you exactly what this looks like with real numbers.

3. The Volatility Decay Table: Where Your Money Goes to Die

This is the most important table in this article. Read it twice.

Imagine you invest $10,000 in three different products. The market experiences two days of movement: up 10% on Day 1, then down 10% on Day 2.

Let that sink in. The underlying index lost exactly 1% over this two-day period. The 2x ETF lost 4%. The 3x ETF lost 9%. The leverage amplified the loss, not the gain — and this happens even though the market was perfectly symmetrical up and down.

This isn’t a trick or a bad scenario I cherry-picked. This is simple arithmetic. It’s the unavoidable consequence of percentage math when you apply a multiplier before each day’s compounding.

The formula for why this happens: when you gain X% and then lose X%, you always end up below where you started. With a regular fund: $(1 + 0.10)(1 - 0.10) = 0.99$, a 1% loss. With a 2x fund: $(1 + 0.20)(1 - 0.20) = 0.96$, a 4% loss. With a 3x fund: $(1 + 0.30)(1 - 0.30) = 0.91$, a 9% loss.

Now extend this over weeks, months, years of daily market fluctuations, and you can see what happens to the leveraged ETF holder relative to the index investor. Every volatile day chips away at the leveraged product. Every oscillation is a small tax on the leveraged holder that the unleveraged investor doesn’t pay.

4. A Worked Example: XEQT vs. a 2x S&P 500 ETF Through a Volatile Period

Let’s make this concrete with a more realistic simulation. Suppose the S&P 500 goes through a choppy six-month period with the following monthly returns:

(XEQT tracks a global index, not just the S&P 500, so its returns will differ slightly — this is a simplified illustration.)

Starting with $10,000:

Regular S&P 500 index fund path: $10,000 → $10,500 → $9,660 → $10,240 → $9,523 → $9,904 → $10,201

2x Leveraged ETF path: $10,000 → $11,000 → $9,240 → $10,349 → $8,900 → $9,612 → $10,189

After six months, both end up at roughly the same place — but the leveraged ETF holder experienced gut-wrenching swings of 16% down in a single month, while the index investor’s worst month was -7.5%. And the leveraged investor got the same result.

Now imagine this pattern extends for years, and you factor in the much higher fees. The leveraged ETF holder is not getting compensated for the psychological and financial cost of those wild swings.

5. The Real Cost: MERs, Swap Fees, and Compounding Expenses

Let’s talk fees, because they compound just like returns do — except fee compounding always works against you.

That’s not a small difference. XEQT at 0.20% per year versus a leveraged product at potentially 3%+ per year means you’re starting every year already behind by nearly 3 percentage points — just in fees.

Compounded over 20 years, that fee gap alone is catastrophic. On $50,000, a 3% fee drag versus a 0.20% fee drag translates to a difference of roughly $70,000-$90,000 in ending wealth, even if the leveraged ETF somehow tracked its benchmark perfectly. It won’t, of course, because of the volatility decay eating into returns simultaneously.

6. The Full Comparison: XEQT vs. Leveraged ETFs

That last row is a joke. Mostly.

7. Who Are Leveraged ETFs Actually For?

This is worth being honest about, because I don’t want to pretend leveraged ETFs have zero legitimate use. They do. Just not for us.

Leveraged ETFs exist primarily for:

• Institutional traders and hedge funds who need to gain or hedge specific short-term index exposure efficiently
• Day traders who open and close positions within the same session, where the daily reset is irrelevant because they’re not holding overnight
• Options-adjacent strategies where the leveraged ETF is part of a complex hedge, not a standalone bet
• Very short-term tactical traders who are actively monitoring positions and have risk management systems in place

Notice what’s missing from that list? “Regular person with a TFSA trying to build retirement savings.” That’s us. That’s almost certainly you, reading this.

The products are explicitly designed for professional short-term use. The prospectus on every single Canadian leveraged ETF includes language warning that the product is not suitable for investors who plan to hold for more than one day. That’s not fine print — that’s the actual intended use case.

When retail investors buy leveraged ETFs and hold them for months, they are misusing the product in a way that guarantees underperformance against simple alternatives like XEQT.

8. The Psychological Toll Nobody Talks About

Even setting aside the math, there’s a human cost to holding leveraged ETFs that I think is underestimated.

When my friend was showing off his HQU gains in that Discord server, he wasn’t showing his losses. Nobody ever does. But I watched him quietly. His position was up 30% in two weeks — thrilling. Then it was down 40% over the following month — silent. Then he sold, locked in a real loss, and moved on.

That’s the typical cycle. The gains feel spectacular because they’re fast and dramatic. The losses feel unbearable for the same reason. This creates a pull toward the worst possible behaviour: buying high after a run-up, panic-selling during the drawdown.

With XEQT, the volatility is real — 2022 was not a fun year to hold an all-equity ETF. But the moves are measured enough that most investors can stomach them. The single-day swings don’t trigger the panic response the same way a leveraged ETF does.

Behavioural finance research is pretty clear on this: volatility leads to bad investor behaviour, which leads to underperformance relative to the fund’s own reported returns. Leveraged ETF holders don’t just suffer from volatility decay — they also tend to buy and sell at the worst possible times because the volatility is so extreme.

The boring simplicity of XEQT is not a bug. It’s a feature.

9. “But What If I Just Hold Through the Dips?”

This is the response I always hear from leveraged ETF advocates. “If you just hold for ten years, the 2x ETF will crush the index.”

Let’s think carefully about this.

First: the volatility decay math doesn’t stop working over long periods. In trending markets with low volatility, a leveraged ETF can outperform — but it needs the market to trend strongly in one direction with minimal choppiness. Real markets are choppy. The 2000-2002 crash, the 2008-2009 financial crisis, the COVID crash in 2020, the 2022 rate-hike selloff — these were all periods of violent back-and-forth movement that would have devastated a leveraged holder.

Second: even in the best-case scenario (a ripping bull market with low volatility, like 2017), the 2x ETF’s returns are eaten into by fees and drag that don’t affect XEQT. The gap between theoretical 2x returns and actual returns is almost always significant.

Third: can you actually hold? The February-March 2020 COVID crash saw the S&P 500 drop about 34% in 33 days. A 2x S&P 500 ETF would have dropped approximately 55-60% in the same period. Could you hold through watching $50,000 become $20,000-22,000 in five weeks? Most people cannot. And the evidence shows they don’t.

XEQT dropped about 27% in that same crash. Brutal, yes. But it recovered to new highs by August 2020 — just five months later. A leveraged ETF holder who sold near the bottom — which data suggests many do — permanently locked in catastrophic losses.

10. What to Do Instead

The answer here isn’t complicated, and I think that’s actually what makes some investors skeptical of it. Surely something as powerful as building long-term wealth needs to be more complex?

It doesn’t.

• Buy XEQT regularly. Monthly contributions, ideally automated.
• Hold for decades. Don’t watch it daily. Definitely don’t compare it to whatever leveraged product is trending in your investment communities.
• Stay boring. The most effective wealth-building strategy for almost all retail investors is also the least exciting one.

If you genuinely want to take on more risk because your time horizon is long and your stomach is strong, the right approach isn’t leverage — it’s increasing your equity allocation. Fortunately, XEQT is already 100% equity. It’s already the most aggressive version of the diversified, low-cost approach.

The only legitimate upgrade from XEQT, for an investor who wants more risk, is holding XEQT for longer and contributing more. That’s it. That’s the whole secret.

The Bottom Line

Leveraged ETFs are fascinating financial instruments. The engineering behind them is genuinely clever. And for the professional traders they’re designed for, they serve a real purpose.

For the rest of us — Canadians trying to build wealth for retirement, a house, financial independence, or just a future that’s a little more secure than the present — they are portfolio poison.

The math is not subtle. Volatility decay is real, compounding, and inevitable. The fees are multiple times higher than XEQT. The psychological toll leads to exactly the kind of panic selling that destroys long-term returns. And the products themselves are explicitly not designed for buy-and-hold investors.

XEQT is boring. It goes up and it goes down and it doesn’t do either of those things in an exciting way. Over 20 or 30 years, that boring behaviour — combined with automatic rebalancing, global diversification, and a 0.20% MER — tends to produce outcomes that blow leveraged ETF holders out of the water.

I’m glad I did that math before I placed the order. My XEQT position thanks me every year.

Yours will too.