7967 / What is the advantage of being able to purchase ETFs on margin?

Investors who hold securities in brokerage accounts can use their portfolios as collateral for loans from the brokerage for purchasing additional securities. These loans and cash for the purchase of securities are held in accounts known as “margin accounts.” Using margin accounts effectively allows investors to use their brokerage’s cash to buy securities and leverage their gains.The dollar amount that is currently available in a margin account for the purchase of securities or for withdrawal from the account using the portfolio as collateral is the “margin loan availability.”

The margin loan availability will change daily as the value of margin debt (which includes purchased securities) changes.

If the margin loan availability amount in an investor’s account becomes negative, the investor may be due for a margin call, which is a formal request that the investor sell some of the marginable securities in order to repay the brokerage.

Planning Point: Purchasing on margin is a higher risk strategy that if executed properly can produce large profits. The fact that ETFs can be purchased on margin makes them more attractive to investors using this strategy. Mutual funds cannot be purchased on margin.