Rethinking Leverage: How Diversified ETFs Offer a Smarter Path to Growth
Leverage often conjures images of margin calls and risky bets, but a new approach is emerging that frames it as a controlled tool for scaling investment portfolios. For Canadian investors, particularly those utilizing TFSAs, RRSPs, or corporate accounts, this strategy offers a potentially cleaner way to increase market exposure without concentrating risk.
The core principle is simple: build a diversified portfolio first, and then apply leverage. This fundamentally differs from attempting to “juice” returns through concentrated bets, instead providing a disciplined method for enhancing growth while mitigating risk.
The Pitfalls of Concentration Risk
One of the biggest challenges for growth-focused investors is inadvertently drifting into concentration, according to industry observers. It’s easy to become overly enthusiastic about specific sectors – like U.S. technology stocks or Canadian financials – or a strong run in emerging markets, ultimately tying portfolio performance to a single region.
However, market leadership is cyclical. As Lazard Asset Management noted in a report from April 2019, while the U.S. may dominate for a period, leadership can shift to Europe, Japan, or emerging markets in subsequent cycles. A globally diversified allocation helps insulate investors from being overly reliant on past performance.
By spreading exposure across multiple regions and economic cycles, investors can reduce the risk of anchoring returns to a single geography and establish a more stable foundation for long-term growth.
Sector Rotation: Another Source of Risk
The same rotational dynamic applies to sectors. While technology may lead for extended periods, energy, financials, industrials, healthcare, and defensive sectors all experience periods of outperformance. According to Novel Investor, as of April 2025, relying on a single sector increases the likelihood of being positioned incorrectly at the wrong time.
A broad allocation across all eleven GICS sectors helps avoid tying a portfolio to any single economic narrative. Rather than attempting to time sector rotations, a diversified mix allows investors to remain invested throughout the cycle, reducing the impact of performance gaps.
Building Blocks for a Globally Diversified Portfolio
The Global X All-Equity Asset Allocation ETF (HEQT) exemplifies this approach. It utilizes a fund-of-funds structure built on Global X index ETFs, providing exposure to core global equity markets. The ETF’s holdings include U.S. large caps, international developed markets, Canadian equities through the TSX 60, emerging markets, U.S. small caps, and the Nasdaq 100.
As Global X Canada highlighted in January 2026, this foundation establishes a fully diversified global equity allocation before any leverage is applied, ensuring broad, balanced exposure.
Introducing Leverage After Diversification
Once a globally diversified base is established, the Global X Enhanced All Equity Asset Allocation ETF (HEQL) applies approximately 1.25× leverage to the entire portfolio. This means every region, sector, and size category scales together, preventing any single segment from dominating the risk profile.
This contrasts sharply with sector-specific leveraged funds, which tie investment outcomes to a single narrative. A lightly levered global portfolio, however, distributes exposure across all sectors, participating in upside across multiple economic drivers. The strategy isn’t about forecasting winners; it’s about diversifying sources of returns before applying leverage, reducing the risk of overexposure to any single area.
Leveraging Diversification with Covered Calls
The benefits of this approach extend to strategies like covered calls. While covered calls can generate consistent cash flow, they may limit upside during strong equity markets. Global X addresses this with the Global X Enhanced All-Equity Asset Allocation Covered Call ETF (EQCL).
This ETF combines the same global equity allocation as the core asset allocation ETF with dynamic covered call overlays and a 1.25x leverage mechanic. The leverage helps offset the potential upside limitations of covered calls, while the income overlay provides steady cash flow. As of January 13, 2026, the ETF aimed to deliver a stable monthly distribution of 11.60% annualized, without concentrating risk in a single region or sector.
A Solution for Canadian Investors
Canadian investors face unique challenges when using leverage. Margin borrowing through retail brokerages can be costly, and registered accounts like RRSPs and TFSAs prohibit borrowing altogether. Even attempting to build a leveraged structure manually can be complex, requiring ongoing management of borrowing costs, rebalancing, and volatility exposure.
Embedded leverage solves these issues by shifting the borrowing to the fund level. This institutional leverage is monitored and integrated into the ETF’s asset allocation framework, automatically maintaining target weights and eliminating the need for investors to track collateral or worry about margin calls. Crucially, because the leverage is embedded within the fund, the ETF remains eligible for RRSPs, TFSAs, and corporate accounts.
A Smarter Approach to Long-Term Growth
Ultimately, the key isn’t leverage itself, but how and where it’s applied. Layering leverage onto a fully diversified global allocation – and pairing it with tools like covered calls – can support a range of long-term investor needs.
Whether prioritizing higher market participation or income, these allocations offer a disciplined approach to staying diversified, fully invested, and navigating different market cycles. The aim is not to chase trends, but to build a solid foundation, maintain broad exposure, and scale investments in a controlled manner suitable for Canadian accounts.
