BMO's 3x LQD notes: 18.95% a year on the long side
Bank of Montreal and REX Shares listed LQDU and LQDD on Cboe BZX in August 2026 as daily 3x notes on LQD. Combined long-side financing and fees: 18.95% a year at a 7% prime rate.
Bank of Montreal and REX Shares have attached three-times daily leverage to U.S. investment-grade corporate bonds, and the cost is not the 0.95% investor fee. The long note, LQDU, finances two times its value at the prime rate plus 2.00%. At the 7.00% prime rate posted for Thursday, September 17, that financing plus the fee is 18.95% a year.
The inverse twin is LQDD. Both are MicroSectors exchange-traded notes due July 31, 2046, issued by Bank of Montreal, listed on Cboe BZX, and linked to the VettaFi Investment Grade Corporate Bond Fund-Tracking Index, which tracks the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD. BMO and REX announced them on Monday, August 10. Cboe lists Tuesday, August 11 as the first trading date; BMO's issue date is Wednesday, August 12.
Notes on LQD, not a bond fund
These are senior unsecured BMO notes, not registered funds. Holders do not own LQD or the 3,170 bonds inside it. They own a BMO promise to pay cash based on a daily +3x or -3x reset on that LQD-tracking index, after fees and charges. The notes do not guarantee principal, pay no coupon, and can be called by BMO in whole or in part on 14 days' notice.
BMO and REX describe them as the first U.S.-listed products offering 3x long and short exposure to the daily performance of LQD and its high-yield cousin HYG. The same launch brought HYGU and HYGD. The issuer is explicit about the use case: daily trading tools for sophisticated investors, not buy-and-hold positions, and not notes to be held to 2046.
The leverage resets at each eligible close. Over any stretch longer than a day, the return will not equal three times LQD. Path, compounding, and the daily charges see to that.
The 0.95% fee is not the bill
Both notes deduct a Daily Investor Fee of 0.95% a year. That is the number that looks like an expense ratio. It is not the economic carry.
On LQDU, a Daily Financing Charge applies to a financing amount equal to two times the prior reset's indicative value. The rate is the Federal Reserve bank prime loan rate plus a spread that starts at 2.00% and that BMO's calculation agent can lift as high as 7.50%. The pricing supplement states the result directly: the charge reduces indicative value at a rate equal to twice the sum of prime plus the spread. At 7.00% prime and the initial spread, that is 18% a year, before the 0.95% fee. If the spread went to its cap at the same prime rate, the combined drag would be 29.95%.
Buyers reaching for a 3x credit product are getting a leveraged rate bet as much as a credit one.
On Thursday, September 17, the day the Federal Reserve's quarter-point hike took effect, the bank prime loan rate moved to 7.00% from 6.75%, and the long note's carry rose with it.
LQDD is built the other way. It accrues Daily Interest at the effective federal funds rate minus the same 2.00% spread, also adjustable to 7.50%. With effective funds at 3.88% on Thursday, that interest is 1.88% a year. Net of the 0.95% fee, the short note currently has a small positive carry, about 0.93% a year, before index moves and compounding. If the spread rose or policy rates fell, that credit could flip negative.
LQDU costs 18.95% a year; LQDD is paid 0.93%
- −19%
- +0.9%
From the close on Tuesday, August 11 through Friday, September 18, LQD returned -0.81% including distributions. Three times that is -2.42%. The long note fell 4.48%. The short note rose 2.82%. At the 6.75% prime rate in force for that stretch, the pricing supplement's daily accrual of financing and fees over those 38 calendar days is 1.92%, against 2.06 percentage points of extra loss on the long note. Carry accounts for the gap. That is not a track record.
Five weeks in, a $5 million pack
BMO sold $5 million of each note to BMO Capital Markets at 100% of principal: 200,000 LQDU notes at $25, and 100,000 LQDD notes at $50. Outstanding counts have not moved. As of Monday, assets were $4.85 million and $5.07 million.
Last prints on Monday were $23.89 on LQDU, unchanged, and $51.14 on LQDD, down 0.46%, each on 6 notes. Average daily volume is about 173 shares for the long note and 765 for the short, or roughly $4,100 and $39,000 a day. That is turnover, not a market you can count on.
Direct issuer redemption requires 25,000 notes, and usually costs a 0.125% redemption fee unless BMO waives it. At Monday's prices that is about $597,250 of the long note, and $1.28 million of the short note: a quarter of the short issue. Most holders will never meet that minimum. They will live in a thin secondary market whose price is not the same thing as indicative value, even though the reference fund trades by the tens of millions of shares.
That is the whole book. The product the notes lever is still LQD, the 2002 iShares fund of U.S. dollar investment-grade corporates: $27.54 billion, with a 0.14% expense ratio.
Frequently asked
What does the long note actually cost to hold?
Combined financing and fees run 18.95% a year at a 7.00% prime rate, not the 0.95% investor fee that looks like an expense ratio.
Do holders own LQD or the bonds in it?
No, they own a senior unsecured Bank of Montreal promise to pay cash based on a daily 3x or -3x reset on an LQD-tracking index, after fees and charges.
Why does the short note get paid instead?
It accrues daily interest at the effective federal funds rate minus the spread, leaving about 0.93% a year net of the fee, which could flip negative if the spread rose or rates fell.
Can you get out of these notes easily?
Direct redemption from the issuer requires 25,000 notes, a threshold most holders will never meet, leaving a secondary market that trades a few hundred notes a day.