# Investing With HELOC



## tygrus (Mar 13, 2012)

I have been offered a sub 3% HELOC on some property I own and have been considering investing it, but I am not sure I can get enough spread to make it worthwhile. Couple ETFs in the 6% range, but they have a MER just under 1%, so return would only be 2.5% maybe. 

Could go more into the REIT world with some of these in the 7-8% range, but they are so jittery with interest rates. Anyone playing a spread and how are you doing it or is it even worth doing at all?


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## Just a Guy (Mar 27, 2012)

It can be done if you know what you are doing. As you stated, you need a better return than single digits, especially when you consider taxes, so your strategy and investing style probably won't work well.

Some of the best, okay more obvious, ways to use a heloc for investing is where you can get a guaranteed high rate of return (say an resp where the government gives you a 20% return he first year or an rrsp where you get a tax break) or something leveraged, like buying physical,real estate that generates a healthy positive cash flow.


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## jaybee (Nov 28, 2014)

Just a Guy said:


> Some of the best, okay more obvious, ways to use a heloc for investing is where you can get a guaranteed high rate of return (say an resp where the government gives you a 20% return he first year or an rrsp where you get a tax break) or something leveraged, like buying physical,real estate that generates a healthy positive cash flow.


 I had never considered using a HELOC for an RESP, but that could be a decent strategy. hmmmmm..


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## Just a Guy (Mar 27, 2012)

A better strategy is to use the government cheques you get each month for having kids...take the "free" money and invest it instead of spending it and every kid in Canada would have a "free" (government paid) education.


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## cashinstinct (Apr 4, 2009)

Just a Guy said:


> A better strategy is to use the government cheques you get each month for having kids...take the "free" money and invest it instead of spending it and every kid in Canada would have a "free" (government paid) education.


That's what we do with the cheques. I let my GF put them in her RRSP each month, automatic TD e-series purchases from her checking account.

I do put the $2,500 annually in RESP myself from my savings.... if I was not able to save enough myself, we would cover difference with the cheques.


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## tkirk62 (Jul 1, 2015)

Remember that the interest on the HELOC will be tax deductible if you use it all for investing. This could reduce the interest paid by about a third once you figure in the tax refund. 

I am investing with leverage now, and if I had access to credit with a sub 3% interest rate I would invest that too. One strategy I have used successfully is invest enough in a REIT or two that the dividend they provide will cover the interest and no more. Then take take the rest and buy shares of low dividend stocks, an index fund, or whatever you like. These will be essentially "free". The REITs will pay the interest each month, then you can take the dividends from the "free" stocks/funds and pay down the HELOC. As you go on the REITS will start covering more than the interest and the excess can pay down the HELOC as well. It will snowball until your HELOC balance is eventually zero.

There are some guidelines to reduce the risk associated with leverage a little bit. Borrow an amount that, in the unlikely event that every stock you bought cut their dividend, you could completely pay the interest on the HELOC balance with your own income/cash flow. Diversify your holdings so that a few different companies are paying your interest and balance. Depending on how much you borrow, two REITs or high yielders, and maybe two "free" stocks. Know going in that you will not worry too much about the price movements of the stocks. Because the dividends are paying down the HELOC, the prices don't entirely matter. Once the line of credit is completely paid off, you then still have all the stocks, so regardless of their share price, they are a bonus.


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## tkirk62 (Jul 1, 2015)

I'll provide an example of this strategy, based loosely on what I have done. 

Borrowing $100K, at 3% interest the monthly interest would be $250. 

Your interest payers could be 500 shares of CPG ($115/month, about $10,000 at current prices), and 2025 shares of DRG ($135.07/month, about $20,000 at current prices). If you don't feel confident in CPG it can obviously be subbed out for something else.

Then you have a little more than $70,000 to invest in stocks you want to hold but don't, are undervalued, have high potential, etc. 

You could buy 500 shares of CWB ($440 per year, about $12,500 at current prices), 500 shares of VUS ($325 per year, about $21,500 at current prices), 100 shares of AGU ($350 (USD) per year, about $13,000 at current prices), and 500 shares of BAM.A ($240 (USD) per year, about $23,000 at current prices).

You'll have borrowed a little less than $100K, CPG and DRG completely pay your interest even if you choose not to pay down the principal. Your free stocks will pay down $1355 of principal each year, and that should increase as their dividends increase. As your principal goes down, some of CPG and DRG's dividends will pay down principal as your monthly interest will be less. Your balance will eventually be paid off even if you never put a cent of outside money towards it. At the end, you will have all of these shares, producing income of at least $4355 (assuming no cuts). These shares should also be worth significantly more than $100K, so you'll have made money that way. There is also the option of DRIPping with your dividends and paying your interest out of pocket. This will boost returns if you could afford it. And in April you should have a tax credit of about $800ish to also pay down the principal (the interest on the HELOC is tax deductible). 

If you have the stomach for it, I think you could do very well with this strategy.


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## Moneytoo (Mar 26, 2014)

@tkirk62, thank you so much for this example! I have both CPG and DRG in my RRSP, so would go with something else if I use this strategy, but wanted to ask you about REITs: do you find them to be a lot of extra hassle tax-wise? (With their payouts being not 100% eligible dividends I mean)


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## tkirk62 (Jul 1, 2015)

Moneytoo said:


> @tkirk62, thank you so much for this example! I have both CPG and DRG in my RRSP, so would go with something else if I use this strategy, but wanted to ask you about REITs: do you find them to be a lot of extra hassle tax-wise? (With their payouts being not 100% eligible dividends I mean)


I don't actually try to deduct my interest, as some of the borrowed money I put into my TFSA. From what I understand you would need to keep reborrowing an amount equal to the ROC portion of your distribution each month. But you don't know how much is ROC until tax time. I personally would either not use REITs for your leveraged holdings, or get a good accountant to explain it to you better. I know people who have borrowed large amounts and put them into REITs (to simulate a rental house sort of thing), but I never figured out what they do about the taxes. 

Maybe what you could do is borrow the full amount but then only try to deduct what you used on non-REITs. Say you put $20K of your $100K line of credit into REITs. At tax time you would only try to deduct the interest off $80K. You could likely deduct more but the interest on $20K may not be worth the hassle. Maybe it would be to you though, to each their own.


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## Moneytoo (Mar 26, 2014)

Yeah I found a good explanation (with the spreadsheet to calculate both ACB and ROC) here: http://www.moneygeek.ca/weblog/2015/03/16/how-use-capital-gains-worksheet , but still can't wrap my head around it completely, so will do some more googling and reading... Thanks again!


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## tkirk62 (Jul 1, 2015)

Moneytoo said:


> Yeah I found a good explanation (with the spreadsheet to calculate both ACB and ROC) here: http://www.moneygeek.ca/weblog/2015/03/16/how-use-capital-gains-worksheet , but still can't wrap my head around it completely, so will do some more googling and reading... Thanks again!


If I were you I would simply avoid buying REITS with your HELOC. By all means buy REITS, but do that with your own money. There are plenty of stocks you can buy that yield around as much for the high yielders in your leveraged holdings, that won't cause the same kinds of headaches. BCE, ECI, T, RY, TD, etc. This ensured that your interest is tax deducible. Then if you are able to save enough to make a purchase with your own cash that's when you can buy a REIT. Easier is better in this case. Keep it simple.


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## Moneytoo (Mar 26, 2014)

Yep, figured as much, and just posted this in Garth Turner's blog for second opinion (as my husband still thinks it's too risky and doesn't want to try it even with 10K... sigh):

"Ok, will buy one more strip bond on Tuesday just in case…  But, if we’re not in a recession and the worst is [almost] over, do you think it’s a good idea:

1) Open a non-reg trading account and fund it with 3.7% HELOC (thinking to start with 10K)
2) Buy one third each monthly dividend paying stocks and/or ETFs to take care of interest payments (for example, Pembina Pipeline and ZPR)
3) Buy a growth ETF with quarterly or semi-annual dividends to use for capital gains and principal repayment (VFV, XEF or XAW)
4) Keep adding borrowed cash and buying more if markets go further down
5) Hold for 10+ years, adding tax returns from interest payments to the principal repayment
6) Sell some holdings, repay the remaining debt, keep the rest

(We’re in 40%+ marginal tax rates, make regular contributions to our registered accounts and won’t have a problem repaying the initial loan quickly if things don’t go as planned)

Thanks in advance to anyone who’s doing something similar for their opinion (and to Garth if he chooses to answer "

Your comment is awaiting moderation. 

About half of my comments there usually don't go through, so will see...


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## tkirk62 (Jul 1, 2015)

From what I know about Mr. Turner and his followers they won't speak kindly for the idea. Quite frankly the reason I praise so glowingly the strategy is that nobody else seems to. Everybody else seems to think: Borrow money -> stocks go down -> you're broke -> your spouse leaves you for someone smart enough to not borrow for stocks. 

I had lots of trouble explaining to people what I was doing. I tried talking to my sister, she is currently borrowing money to buy a brand new car. I said she could use some of the extra line of credit room to either add to her BNS holding or buy something else. She said "No I don't want to lose all my money". I can see you have the same problem with your husband. 

To me it is simple that if you can afford to pay the interest it is essentially automated savings. Instead of saving $500 a month and waiting to make a purchase, you make the purchase when it is priced right and then do the saving up afterwards. It sounds like with your income you can definitely handle the interest payments and could even quickly pay back the whole thing if for some reason it came to that. And you are in a position where you could really benefit from the tax deduction.


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## james4beach (Nov 15, 2012)

The HELOC is a callable loan. The bank may require that you repay it at some point.

A problem here is that if the investments do very badly (i.e. keep declining due to economic turmoil and credit tightening), this is also a scenario in which the loan may be called. It's also a scenario in which you're more likely to lose your job. Confluence of these events does happen (e.g. USA in 2008, 2009). You could be forced to sell your investments and realize a big loss at the worst possible time, and/or have trouble making payments due to job loss.

More generally, I'd think about the long term return from your investments (total return is the only relevant figure). The TSX annualized 10 year total return is 5.7%. I would also try to figure out a 'worst case' 10 year return to get an estimate of min/max/avg.

A very crude search shows me a 10 year TSX period with annualized return 1.0%. So, crudely... min: 1.0%, max: 8.7%

Now you have to ask yourself, given that your 3.7% borrowing rate can be changed any time (and even withdrawn), is there enough of a potential benefit to borrow for those returns? For instance if the question was to borrow at 1% and historical returns looked like [5% to 10%] I'd say that looks pretty good. But your situation is much narrower than that, with less benefit.


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## OnlyMyOpinion (Sep 1, 2013)

^+1 Agree with James. Market and interest rate cycles are not at points where I'd go into debt to fund equity investments. With the ability to save lots (2 good working incomes), why take on additional risk and limit your financial flexibility. Same with consumer debt x 2.


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## tkirk62 (Jul 1, 2015)

Moneytoo I believe intends to pay down the principal rather than let it ride like some do. This reduces the risk considerably.

And yes, it's possible the basket doesn't return enough to make it worthwhile. Perhaps it's even likely. But if she picked a bad 10 year period, with 1% returns, she'd be out $2700 (total return) the first year, but then you add about $800 for the tax deduction. So $1900 the first year. Assuming some principal has been paid down, it would be progressively less and less.

Here's one case where I don't agree total return is all that matters. If dividends can cover the interest, and pay down some principal, there is no money out of pocket. If the stocks go down by 5% every year for ten years (unlikely), at the end of the ten years the stocks will be worth about $60K. In this case the total return (assuming 4% yield) would be -1% annually. First year the interest is $3700, less $1480 tax deduction (40% marginal rate as stated above), so $2220. Yield of 4% pays out $4000 so positive cash flow without selling the shares is $1780. Pay down principal with that, and now the HELOC is worth $98220 and the stocks worth $95K. Second year interest is $3634.14, less $1453.66 tax deduction. Pay out is the same $4000 so positive cash flow is now $1819.52. Pay principal down with that, HELOC = $96400, stocks worth $90250. And so on. This borrowed money is providing positive cash flow, even if the share prices are going down, without Moneytoo shelling out any money. If at the end of the ten years the HELOC has been fully paid off, then she is left with, and I say this is probably worst case scenario, $60K. And she got these stocks for free. This is in addition to whatever they can save in addition to the HELOC portfolio. 

I didn't feel like calculating the tax on the dividends. I didn't feel like carrying on the calculations, though it can easily be done. My point is that cashflow without selling shares (which would reduce the future cashflow) can pay for the interest and then some. Hell, if let's say PPL rushed up for some reason, if it was calculated to be advantageous she could sell shares to reduce principal which reduces the cashflow needed. If they go down though the cashflow stays the same. To me even a bad case still seems worth it to me. 

Again, it's a risk tolerance thing.


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## Moneytoo (Mar 26, 2014)

@tkirk62, your strategy makes perfect sense to me. And I've been toying with the idea of using HELOC to buy investments that pay for themselves for a while, but what Garth usually recommends didn't make sense to me:

"Lots of people have mortgages and investment portfolios concurrently. If that’s you, consider cashing in your financial assets to trash your home loan. Next, borrow against your house in the form of a secured HELOC (you can get 65% of the equity as a line of credit and other 15% as an amortized loan) and invest the money, *buying back your ETFs, real estate trusts and bonds.*"

(c) http://www.greaterfool.ca/2015/03/15/insulation

From other sources that I googled, all agree that bonds should remain in registered accounts, but preferred shares make sense in non-registered (hence ZPR) 

My husband's major issue with it is that he loves being debt-free (our mortgage is paid off) and doesn't want to end up owning money if the stocks that we choose cut the dividends or ETFs get delisted and we're forced to sell them at a loss. But he said he'd be more open to the idea if there's a 30%+ market drop, so for the time being I'll keep track for what I wanted to buy - and we'll review it next year


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## Moneytoo (Mar 26, 2014)

james4beach said:


> The HELOC is a callable loan. The bank may require that you repay it at some point..


If Scotiabank calls our loan - we'll get another one from TD (or pay it with cash from our other accounts if it's under 50K )



> More generally, I'd think about the long term return from your investments (total return is the only relevant figure). The TSX annualized 10 year total return is 5.7%. I would also try to figure out a 'worst case' 10 year return to get an estimate of min/max/avg.


I don't know why you try to compare a mix of ~30% Canadian stock, ~30% preferred shares ETF and the rest in U.S. or international ETF with TSX returns, so please forgive me for disregarding your concerns (I believe I've read them all in other threads before... )


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## treva84 (Dec 9, 2014)

Let's say you have RRSP contribution room - can you use the HELOC to fund an RRSP contribution leading to double tax credits (RRSP contribution credits and then interest on an investment loan credits)? I suppose the only problem is that you can't then use dividends from your investments to cover the interest or principle, like you can in a non reg account.


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## Moneytoo (Mar 26, 2014)

@treva84, Note that you SHOULD NOT use the HELOC money to invest in your RRSP as you will lose the tax deduction on the invested money.

The only unknown for me is how much tax credit on interest payment is vs how much tax paid on dividends, that's why I wanted to start with a small amount to see the numbers after I do next year's tax return


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## tkirk62 (Jul 1, 2015)

The tax on dividends is less than your income. It depends how much, and I think the "discount" diminishes as your income increases. So your tax deduction on $3700 of interest should be more than the tax you pay on the dividends the HELOC provides. It all depends on your income, your deductions, how much your dividends are... it depends on a lot. I don't think the taxation of your dividends would be something to fret about too much.

What I would maybe do is ease into it Moneytoo. Maybe you think the banks are beat up, so you buy $5 of TD. Your husband sees what happens, the sky doesn't fall. In a couple months maybe something else you were looking at is beat up, and you throw some money at that. I would want to put all my money in at once to get it working for me, but I only have to appease myself.


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## Moneytoo (Mar 26, 2014)

Well I'll need his signature to open a joint non-reg account, so I guess it won't hurt to "paper-trade" for a few months first (either he'll see that it's not that scary - or I'll see that it's not as easy as it seemed )

We still save and invest a ton of money, this is just something I wanted to try to accelerate the process...


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## GPM (Jan 23, 2015)

Money Two. I will never pretend to know anywhere near as much as you or any of the other senior members of the forum about investing, especially after seeing your money blog. However, before becoming a DIY investor, I dealt with the two sleaziest and most self oriented investment advisors ever. I followed this with a Vice President/ main branch manager in a major city at RBC Dominion Securities (changed when I moved as the time difference was an issue). The same advice from all three. Never borrow to invest in the markets. The VP said to actually fire anyone who suggested it. My accountant was a partner at KPMG. He only ever saw misery but couldn't give advice (unlicensed). I followed their advice. Just the experience of someone who sought advice from two people who I thought would recommend it, in retrospect, and two VERY smart individuals. Especially my accountant. Your savings rate and frugal living will allow you too reach your goal likely, even without leverage. There is nothing like debt free. Anyhow, to each their own. Good luck with the strategy!

Note: risk has never bothered me, it was just prudent in my individual case to avoid this unnecessary risk.


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## My Own Advisor (Sep 24, 2012)

"Your savings rate and frugal living will allow you too reach your goal likely, even without leverage. There is nothing like debt free."

Well put GPM.


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## SkyFall (Jun 19, 2012)

Wait wait just to be clear, about the fact that HELOC is callable loan, yes they are but how often do that really happens? I've never seen one since I start working for a bank, as long as you are making payments why would they call your loan? The only reason is if the bank made bad financial choices and need to cover some exposure and they want to deleverage badly, but that is very rare. They will not call back your HELOC because your investment dropped by 25%, 50% or 75%... not as long as you make your payments. Hence how will they know what you are doing with the money i.e. take 100k out of our TD HELOC and put it in RBC Direct Investing and both parties respectively have no clue where the money went or where it came from. Investment that dropped in value (invested with HELOC) is not as bad as people using their HELOC to go on vacations or buy miscellaneous things that has no value...

p.s. I am not saying the strategy is correct or not, just wanted to clear the point made on the heloc


my2cent


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## janus10 (Nov 7, 2013)

My wife supported the idea of using a HELOC to invest but we also went with the strategy of continuing to pay it down as though it was our mortgage payment. Plus we invested primarily in blue chip dividend payers so that if we lost our jobs (which we both did for a period of over 6 months), the dividend stream would have been more than enough to cover the interest.

As it was, we had such large severance packages, we kept making the P+I payments without interruption.

I'd be a bigger fan of using a HELOC when the markets have come into a correction phase than when near their top. Of course, one doesn't know if things will get (much) worse before they get better so a phased approach to putting money to work over a period of months isn't a bad idea.

I also wouldn't do it unless your spouse also can sleep at night. I stuck to my guns, but when your investments are down by six figures and you've actually hammered your NW by leveraging, you tend to not feel too smart.


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## Moneytoo (Mar 26, 2014)

Thank you all. I've read a bunch of articles against borrowing to invest, and a few pro, here're a couple quotes:

"Leverage is synonymous with risk for many investors, but used moderately, as some of the world’s best investors including Warren Buffett do, it can turn good portfolios into great ones."

http://www.financialpost.com/m/wp/b...ike-warren-buffett-to-power-up-your-portfolio

"The stock market’s much-anticipated next correction will briefly open the door to an investing strategy that is almost never a good idea.

Borrowing to invest – a.k.a. leveraging – is the definitive case of an idea looking good on paper and too often turning out to be disastrous in real life. Only the steadiest of investors can handle the idea of going into debt to buy into the ever-unpredictable stock market. Most people are wired to panic and sell when the stocks they bought with borrowed money tank, thereby guaranteeing a bad outcome.

But the case for borrowing to invest, and there definitely is one, is considerably stronger when you do it after stocks fall in price. “Even the most cautious, including myself, would have to agree that, done right, this is truly a wealth-building strategy,” said Talbot Stevens, author of _The Smart Debt Coach,_ who runs seminars for investment advisers on leveraging.

...

Normally, a leveraged investment should be held for the long-term, say 10 years, to allow the market’s good years to overwhelm the bad. But Mr. Stevens said that if borrowing to invest after a market correction, a shorter-term approach of capturing the rebound can work as well."

http://www.theglobeandmail.com/glob...-invest-maybe-just-this-once/article19575615/

__________________

I also found the solution for my husband's concern that when interest rates go up, our dividends may not cover the interest payments - TD's HELOC can be locked in:

*Fixed Rate Advantage Option *– Lock all or a portion of your outstanding balance into a fixed interest rate for a closed term of one to five years to protect yourself from rate increases on your variable rate portion and establish regular fixed payments (subject to minimum amounts).

http://www.tdcanadatrust.com/m/mortgages/mobile-home-equity-lineof-credit.jsp

___________________

So the only valid argument that stops me is that I don't have enough experience and can't guarantee that the dividends won't be cut (I own CPG for example) or ETFs delisted (we hold ZPR in two registered accounts and know how much it dropped) But I still think it's a good idea to borrow to invest at an opportune moment (and hopefully will do it one day - just not today... )


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## Echo (Apr 1, 2011)

I asked a bunch of financial experts to share their thoughts on borrowing to invest. Here is the (mostly) negative view of leverage - http://www.boomerandecho.com/borrowing-to-invest-what-the-experts-have-to-say/

And here is the guide for those who are going to do it anyway  - http://www.boomerandecho.com/leveraged-investing-a-guide-for-those-who-cant-help-themselves/


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## andrewf (Mar 1, 2010)

I am personally waiting for a big fall in stock prices before leveraging into equities. In 2009 I had just started working at had zero NW. Now that my NW is in the 6 figures and I have a higher income, I am in a good position to leverage into equities when they are cheap. Problem is that they are not cheap right now. On the bright side, this bull market is long in the tooth, so we may be only a couple of years away from a decent correction.


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## james4beach (Nov 15, 2012)

I'm with you, andrewf. I think we'll get a chance to buy stocks significantly cheaper.

My preferred form of leverage would probably be using those LEAPS XIU calls, like humble_pie has talked about


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## andrewf (Mar 1, 2010)

Will those LEAPs really be cheap during a market correction (the rebound should be priced in)? I was thinking of just borrowing to invest in boring old stocks.


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## james4beach (Nov 15, 2012)

I guess I'll have to see what kind of premiums would exist on them. I suppose you meant just using regular margin loans (30% or whatever is standard these days) with something like XIU or XIC ?


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## andrewf (Mar 1, 2010)

Not necessarily margin. I do have an account with IB, so I have access to non-absurd margin rates. That said, I am more comfortable with loans that won't be susceptible to margin calls.


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