Margin investing can be a powerful tool for amplifying returns — but it also introduces significant risk. While some experienced investors use margin as part of a broader strategy, it's not a decision to take lightly. For ETF investors, in particular, understanding how margin works, what it can (and can't) do, and where it fits in a portfolio is essential before getting started.
This article unpacks how margin works with ETFs, the potential benefits, and the risks investors need to keep in mind.
What is margin investing?
At its core, margin investing means borrowing money from your broker to invest. It's a form of leverage : instead of investing only your own funds, you’re using debt to potentially increase your buying power.
When you open a margin account with a broker, you're allowed to borrow up to a certain percentage of your portfolio’s value — typically 50% to 70%, depending on the platform and your assets. This borrowed money is subject to interest charges , which accrue daily and are payable monthly or as agreed.
Example:
If you have $10,000 in cash and your broker allows 50% margin, you could borrow another $5,000, giving you $15,000 in total buying power.
Unlike using a credit card or personal loan, margin loans are secured against the assets in your portfolio. If the value of your holdings drops too far, your broker may issue a margin call — requiring you to deposit more funds or sell investments to reduce your debt.
🔗 Related: How do I know what my risk tolerance is?
How does margin work with ETFs?
In the context of ETFs, using margin typically means borrowing money to buy more of an ETF than you could with your own capital.
Let’s say you're bullish on an ETF like VAS (which tracks the ASX 300) or VGS (which tracks global shares). Instead of only investing $10,000 of your own money, you might use $5,000 of margin to buy $15,000 worth of the ETF.
This can be a way to:
- Increase exposure to a broad index without committing more capital
- Take advantage of short-term market dips if you believe the ETF is undervalued
It’s worth noting that this is not the same as buying a leveraged ETF , which is a separate product structured to provide 2x or 3x the daily return of an index. In contrast, margin investing involves borrowing to buy a standard ETF and carrying interest and debt risk over time.
🔗 Related: How do leveraged ETFs work?
The potential upsides of using margin
For confident investors, margin may offer some benefits — especially in specific market environments or under particular conditions.
1. Amplified returns in rising markets
Because margin allows you to control a larger investment with less of your own money, gains are magnified when markets rise. If your ETF increases in value, your return on equity will be higher than it would have been without borrowing.
Example:
If your $15,000 ETF position increases 10% to $16,500:
- Without margin (investing $10,000): your gain is $1,000 (10%)
-
With margin (investing $10,000 + $5,000 borrowed): your gain is $1,500
→ After repaying the loan, you’ve made $1,500 on your $10,000: a 15% return (before interest costs)
2. Strategic buying opportunities
Some investors use margin as a short-term tool to take advantage of buying opportunities — such as market dips — when they don’t want to sell existing holdings. This requires strong conviction and comfort with short-term volatility.
3. Increased exposure with less upfront capital
For investors with a long-term horizon , margin may offer a way to gain broader market exposure without needing to liquidate other assets. It can be appealing if you believe long-term returns will outweigh interest costs — though that’s far from guaranteed.
The risks and downsides to be aware of
While margin has the potential to enhance returns, it also comes with real and sometimes severe risks.
1. Amplified losses in falling markets
Just as gains are magnified when markets rise, losses are magnified when markets fall . If your ETF declines in value, you still owe the borrowed amount — and the percentage loss on your own capital can be far higher than it would be without leverage.
Example:
A 10% market decline on a $15,000 investment could mean a $1,500 loss.
If you only invested $10,000 of your own money, that’s a
15% loss
on your capital — before interest.
2. Margin calls and forced selling
If the value of your ETF holdings drops below a required threshold, your broker may issue a margin call . You’ll be required to either:
- Deposit more cash or
- Sell assets to reduce the loan
This can lock in losses during downturns and force you to act at the worst possible time.
3. Interest costs
Margin loans accrue interest daily, often at variable rates. Over time, this cost can eat into your returns — especially in high interest rate environments.
If your ETF earns an average return of 7% per year, but you’re paying 8% interest on borrowed funds, your margin use could be net negative .
4. Behavioural risks
Using margin can amplify emotional responses , particularly overconfidence during bull markets or panic in downturns. The pressure of potential margin calls or large losses can lead to rushed decisions or abandoning long-term plans.
Is margin right for every ETF investor?
Margin investing isn’t inherently good or bad — but it isn’t appropriate for everyone. Whether it fits your strategy depends on several factors.
Situations where margin may be more appropriate:
- You have a stable income and can meet margin calls if needed
- You understand the mechanics and risks of leverage
- You have a long-term outlook and tolerance for volatility
- You’ve assessed your risk tolerance and how margin might affect it
Situations where margin may not be appropriate:
- You rely on short-term liquidity or can’t cover a margin call quickly
- You’re investing in volatile or narrowly focused ETFs
- Interest rates are high, reducing the appeal of borrowing
- You’re emotionally affected by market swings
It’s also worth considering whether alternative strategies , like using low-interest personal loans, align better with your goals — although those carry different risk and repayment obligations.
Important distinctions to keep in mind
Margin investing is often confused with other strategies. Here are some key differences:
Margin investing vs leveraged ETFs
- Margin = borrowing money to buy standard ETFs
-
Leveraged ETFs = funds which aim to deliver amplified
daily returns
(e.g. 2x or 3x an index's performance), but which can carry commensurate risk
Margin investing vs personal loans
- Margin = secured against your brokerage assets; subject to margin calls
- Personal loan = unsecured or secured against other assets; fixed terms and repayments
Regulatory and platform considerations
Margin investing is regulated in Australia under ASIC’s rules for margin lending facilities . Lenders are required to assess whether a margin loan is suitable for a client’s circumstances, including their financial position and investment experience.
If you’re considering using margin, it’s essential to read the product disclosure statement (PDS) and understand your obligations under the facility.
Final thoughts
Using margin to boost ETF returns is a high-stakes strategy with potential rewards and real risks. It may offer opportunities for greater returns in bullish markets — but it also increases exposure to loss, interest costs, and behavioural pitfalls.
For most investors, the decision to use margin should be grounded in a clear understanding of the mechanics , a realistic assessment of risk tolerance , and a long-term plan . As with any investment approach, the right choice depends on your personal goals, financial position, and comfort with uncertainty.
Margin is a tool — not a shortcut. And like any powerful tool, it needs to be handled with care.
