u/holymolyratio

I’m debating about using 1.18x leverage with Wealthsimple's Portfolio Line of Credit, with my TFSA as collateral, to invest into XEQT. Is anyone else doing this? Wanting to confirm my math checks out.

From my understanding, the portfolio LOC, you can borrow up to 35% of the value, although I only want to leverage 18%.

Total amount borrowed: $20000. Cost of borrowing is 4.45%.

Risk v Return Analysis:

Assuming an average return of 7% over 7 years with XEQT\*.

$20,000(1.07)\^7 = $32,100

Cost of borrowing = 20,000 \* 4.45% \* 7 = 6,230. (Although from other sources, I understand that borrowing to invest can be tax-deductible in a non-registered account, which might drop COB to approx 4%, although it's not included in the calculation).

Total gain/loss: = 32100 - 20000 - 6230 = 5870.

50% tax applied to the gain = 2935, 30% rate = $880.50

Total gain after tax = $4989.50.

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I would need the market to gain an average of 3.9% over 7 years, anything below that is a loss.

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Looking at possible margin calls/warnings:

To get a warning, assuming a 50% loan to value ratio is used, the market would need to drop 64%.

Liquidation against TFSA occurs roughly with a 72% drop in XEQT, as my entire portfolio is just the one holding.

\*I used many different forecasting values to determine a 7% average return.

I'm debating about using 1.18x leverage with Wealthsimple's Portfolio Line of Credit, with my TFSA as collateral, to invest into XEQT. Is anyone else doing this? Wanting to confirm my math checks out.

From my understanding, the portfolio LOC, you can borrow up to 35% of the value, although I only want to leverage 18%.

Total amount borrowed: $20000. Cost of borrowing is 4.45%.

Risk v Return Analysis:

Assuming an average return of 7% over 7 years with XEQT*.

$20,000(1.07)^7 = $32,100

Cost of borrowing = 20,000 * 4.45% * 7 = 6,230. (Although from other sources, I understand that borrowing to invest can be tax-deductible in a non-registered account, which might drop COB to approx 4%, although it's not included in the calculation).

Total gain/loss: = 32100 - 20000 - 6230 = 5870.

50% tax applied to the gain = 2935, 30% rate = $880.50

Total gain after tax = $4989.50.

---

I would need the market to gain an average of 3.9% over 7 years, anything below that is a loss.

---

Looking at possible margin calls/warnings:

To get a warning, assuming a 50% loan to value ratio is used, the market would need to drop 64%.

Liquidation against TFSA occurs roughly with a 72% drop in XEQT, as my entire portfolio is just the one holding.

*I used many different forecasting values to determine a 7% average return.

Does anyone do margin on XEQT? I feel like a leveraged position of 1.2x would be moderate exposure. Just making sure I get my math right. IKBR charges 3.99% interest on margin.

10k invested, 2k on margin in non-registered.

Interest rate if prime remains the same: 2k x 3.99% =79.30 yearly. Monthly is ~$6.65.

Keeping it in the market for 7 years assuming a 8% return annually with DRIP turned on.

End value: Approx $20570
Interest: ~$560.

End value: $20570-2000-560 =$18,010.00
Without leverage: ~$17140.

Difference is around $870 for net gain.

For the margin call to occur, assuming a 30% variance, the market would need to crash 76%.

If the market goes down 20% in a year for the first year. Account value; 12k x 0.8 = $9600-2000 =$7,600.00 due to the extra leverage for a loss of 24%, if I sold. Assuming the market goes up overtime and you don’t undergo the psychological pressure of selling, is this really bad idea to invest with margin over time?

My parents have never invested before and I finally got them to make a self-directed investment account. They are about 12 years from retirement. I feel like XBAL is more appropriate due to their lower overall risk tolerance as XBAL is a 60/40 split.

But I'm also contemplating moving their funds to XEQT for about 6 years and adjusting their portfolio in the later years as they reach closer to retirement.

Any thoughts?