Lombard loans for ETFs: return booster or playing with fire?

This time we’re tackling a highly controversial topic: leveraging your return on equity with credit-financed equity ETFs. In fact, for many investors, including much of the blogging community, investing with borrowed money is a no-go. Not for us. In this blog post, we share our experience with Lombard loans, show you how to confidently steer clear of the dreaded “margin call” scenario, and explain when you should definitely keep your hands off securities-backed loans.

Let’s start with a short, tempting thought experiment: “If global ETFs return a good 8 percent a year over the long term and loan interest rates are well below that, then investing with borrowed money is a fantastic deal, a real no-brainer.”

What is a Lombard loan?

A Lombard loan is a securities-backed loan. In other words, in return for pledging your liquid securities, such as shares (or equity ETFs) or bonds, your custodian bank gives you a credit line that you can draw on flexibly. The pledged securities remain your property, and you continue to benefit from any increase in value and from dividend payments.

You pay interest on the amount of credit you use. This interest rate is often significantly lower than for a personal or consumer loan. That’s because your pledged securities give the bank additional collateral (similar to financing a property with a mortgage). This considerably reduces the default risk for the lending bank. In other words, if you are no longer able to pay the interest and repay the loan, the bank can simply sell your collateral in the form of securities. In summary, a Lombard loan has the following features:

• Pledging of the assets in your securities account
• The maximum loan amount depends on the value of the pledged assets (as a rule, the safer the bank considers the securities to be pledged, the larger the credit line it grants.)
• Obligation to add funds or forced sale in the event of a shortfall (“margin call”)
• As a rule, can be terminated by either party at any time

What types of Lombard loans are there?

According to our research, the Swiss market often offers current account Lombard loans and, less often, fixed-advance Lombard loans. Unlike a fixed advance, the current account variant usually has no fixed term, no fixed loan amount and no fixed interest rate. Instead, with the current account variant you can usually terminate the loan at any time and use the credit line granted flexibly according to your actual needs (and only pay interest on what you use!). Finally, the interest rate is flexible too, i.e. it can change daily depending on market conditions. In this article, we focus on the “current account Lombard loan” variant.

The explanations in the section above are a simplified description of securities lending business. Before taking out a Lombard loan, you should carefully study the individual contract terms and the small print of your lending custodian bank. 

Why should I take out a Lombard loan at all?

You can pursue various goals with a Lombard loan. In any case, you get additional liquidity without having to sell your securities. You can use this extra cash for different purposes: for example, a trip around the world, a new kitchen or additional investments.

We focus on additional investments (in equity ETFs), because only then can you leverage your return on equity. In other words, when you invest with leverage, you are basically always pursuing the same goal: moving large sums of money with little capital.

Soberly, i.e. purely financially speaking, a Lombard loan pays off whenever the price gains including dividends exceed the loan interest. 

What is a loan-to-value ratio?

The pledged assets are lent against at a percentage of their market value. This so-called lending value rate, also known as the loan-to-value ratio (LTV), varies depending on the risk, the tradability of the security and the bank.

Let’s assume you have a global equity ETF portfolio with a market value of CHF 100,000 and want to take out a Lombard loan. Your custodian bank first carries out a risk assessment of your portfolio. On this basis, it determines the loan-to-value ratio, which must not be exceeded, otherwise you face a margin call. But more on that later.

The safer the bank rates your portfolio, the higher the maximum loan-to-value ratio will be. In this article, including the following example, we always assume a maximum LTV of 50%, which is realistic for a broadly diversified equity ETF portfolio.

This means that on top of your own securities worth CHF 100,000, you can get up to another CHF 100,000 in borrowed capital. If you use the entire credit line and invest it in securities, you have leverage of two.

The higher the loan-to-value ratio (LTV), the more leverage potential you have. So the LTV formula is:

LTV = loan / value = Lombard loan / portfolio value

Portfolio value = 200,000 (current market value consisting of equity and loan)

Equity = 100,000

Loan = 100,000

LTV = 100,000 / (200,000) = 0.50 = 50%

Starting from an LTV of 50%, the chart below shows the interplay between price performance and LTV. As a rule: when prices, and thus the portfolio value, rise, the LTV falls, and vice versa.

Thanks to prices rising at the start and mostly rising afterwards, the LTV never entered the critical “margin call” danger zone during the entire 14-year period, which in our example would have meant an LTV above 50%. (As we will show later, we strongly advise against using the entire credit line up to an LTV of 50% right from the start.)

How does the loan-to-value ratio affect my return on equity?

In short: very directly, both when prices rise and when they fall. This leverage is therefore a double-edged sword.

To put it in concrete terms using the example above: if your securities account rises by 10% to CHF 220,000 after one year, the credit leverage doubles your return on equity to 20% (20,000 price gains on securities / 100,000 equity invested). Without a Lombard loan, your return on equity would only be 10%.

With price losses, things look correspondingly bleak: in a 10% market slump, your portfolio value drops to CHF 180,000. Your leveraged negative return on equity doubles to -20% (20,000 price losses / 100,000 equity invested) instead of -10% without a Lombard loan.

What interest rates should I expect?

Interest rates for Lombard loans vary enormously from provider to provider. But even among the more affordable online brokers, the terms can differ quite significantly, as the following table shows:

Provider	CHF	EUR	USD
DEGIRO	2,5%* - 4%	4,75%* - 6,25%	5,25%* - 6,9%
Interactive Brokers	1,5%**	3,7%**	5,13%**
Saxo Bank	2%***	3,91%***	5,7%***
Swissquote	3%	5,03%	6,63%

Different margin conditions depending on currency and provider as of 24 July 2026. *Fixed advance, i.e. interest is charged on the entire amount allocated, regardless of how much is actually used. **Up to CHF/EUR 90,000 or USD 100,000, then gradually cheaper. ***For the Classic account model; lower interest rates for the Platinum and VIP account models.

You can find the current Lombard loan terms of the four providers via the following links: DEGIRO | Interactive Brokers | Saxo Bank | Swissquote

On our new recommendations page, you’ll find the key features and terms (including bonus credit) of these four online brokers.

In our experience, Interactive Brokers has offered extremely attractive terms for Lombard loans, even over longer periods. Nevertheless, it’s worth doing your own research and checking the terms of your existing custodian bank first. After all, the securities to be pledged must be held in the securities account of the lending bank. 

What are the risks of a Lombard loan?

Risk and Lombard loans go hand in hand, which is why we want to give this topic plenty of space. In particular, you should understand and keep an eye on the following three risks:

Risk: “locking in price losses through a margin call”

We see the risk with the greatest financial impact in the broker forcing a sale of the collateral. How can it come to that? Basically, whenever the value of your margin account (i.e. an account partly financed with a securities-backed loan) falls below the minimum amount required by the custodian bank (maintenance margin), so that the LTV exceeds the maximum permitted limit.

Although the term “margin call” is still in common use and has been known to a wider public since the 2011 film of the same name, it has long ceased to be taken literally.

So your bank advisor won’t pick up the phone as in the old days, but will ask you in writing to inject additional capital or sell your positions within a certain deadline.

Otherwise, i.e. if you don’t meet the margin call, your bank advisor will close the positions concerned himself. In other words, he sells the collateral that has fallen in value at a time that is extremely unfavourable from the investor’s point of view.

To avoid a margin call, you should consider the following preventive countermeasures:

• Pledge “good collateral” to the bank, e.g. broadly diversified equity ETFs. Reason: the safer the bank considers the pledged securities to be, the more generous the loan-to-value ratio (LTV) will be, giving you a bigger safety margin (see next point).
• Don’t use the full credit line, i.e. start with a low LTV (e.g. 20%) that is well below the LTV granted by the bank. For broadly diversified equity ETFs, the bank usually works with a maximum LTV of 50% or more.
• Don’t take out loans at all-time highs, only in bear markets. The ideal moment would be at the start of a longer recovery phase. But hitting such perfect timing is of course pure luck and can only be determined with certainty in hindsight. (Later on, we’ll show you a rule-based approach to borrowing in detail.) 

Risk: “rising interest costs”

Interest rates for Lombard loans can change depending on market conditions and currency. What drives Lombard loan rates in your home currency is the policy rate, which is set and regularly reviewed by the Swiss National Bank (SNB).

So the higher the policy rate, the higher the Lombard loan rate and the higher your ongoing interest costs. Besides the policy rate, the margin of the lending bank also affects interest costs. As we’ve already seen above, Lombard loan terms vary greatly from provider to provider. 

Despite these recent rate rises, interest rates in Switzerland are currently significantly lower than abroad (USA and euro area), and as a rule this was also the case in the past. This is reflected in Lombard rates, which vary widely depending on the currency.

Nevertheless, to avoid the risk of excessive interest costs, you should consider the following countermeasures:

• Avoid financial hardship through careful budgeting with an imputed interest rate of 5% (i.e. budgeting with a safety margin, as in the mortgage business)
• Only take out a Lombard loan in your home currency, CHF, to avoid currency risks and to benefit from interest rates that are generally lower and more stable than in foreign currencies
• Set an interest rate limit when taking out the loan

Risk: “your own nerves”

The two risks mentioned above can be kept under control with a rule-based approach. We’re convinced of that. We’ll go into this in more detail later. Things look very different, however, when emotions take over and panic spreads after heavy (paper) losses.

In other words, you should honestly answer the following question: How have I reacted to price losses so far? If you’ve always kept your cool and (in a rule-based way) topped up your portfolio at low prices, Lombard loans could be an option for you.

If, on the other hand, like most investors, you suffer from loss aversion, we think you should generally keep your hands off Lombard loans. A good quality of life, which includes sleeping well, is definitely worth more than maximising profits!

In which market phases does leveraging with Lombard loans make sense?

Regardless of the general state of the stock market, the question is whether the interest rate environment described above should determine whether or not you take out a Lombard loan.

While Stefan would only consider borrowing if Lombard loan rates were moderate (below 3%), the interest rate level plays only a minor role for Toni and hardly affects his decision to borrow.

Either way, luckily Switzerland is traditionally a low-interest-rate country, which is why Lombard loans in Swiss francs are comparatively cheap. 

In practice, Lombard loans are often used short term for speculative investments. Anyone who wants to speculate on short-term gains therefore leverages up especially in bull markets, i.e. during stock market booms.

The speculator hopes that the price of a promising stock will soon go through the roof.

In other words, he is riding the momentum. In finance, momentum describes the tendency of stocks with comparatively strong gains in the recent past to continue to perform above average in the near future. 

An opposing tendency is described by the statistical term “regression to the mean”. This is a phenomenon that affects the long-term performance of returns on investments.

Statistically speaking, the returns of shares and other investments always move around their long-term mean over a longer period of time. This means that the gross return on your investment will sooner or later revert to a long-term market average – regardless of whether the initial returns were positive or negative. However, this mainly applies to medium- to long-term periods. For periods of less than 5 years, regression to the mean does not apply.

Based on this phenomenon, it seems sensible, in turn, to leverage with securities-backed loans in bear markets. Ideally, that is, when prices of an index such as the MSCI World are well below their all-time high.

MSCI World performance by lows

Start	End	Duration in days	Drawdown	after 1 year	+/- peak*
20.11.1980	12.08.1982	630	-28%	47%	6%
27.08.1987	26.10.1987	60	-24%	25%	-5%
04.01.1990	28.09.1990	267	-26%	21%	-10%
20.07.1998	05.10.1998	77	-21%	36%	7%
27.03.2000	09.10.2002	926	-51%	36%	-33%
31.10.2007	09.03.2009	495	-59%	70%	-30%
21.05.2015	11.02.2016	266	-19%	24%	0%
26.01.2018	25.12.2018	333	-20%	31%	5%
12.02.2020	23.03.2020	40	-34%	74%	15%

The table uses the MSCI World Index to show all stock market crashes (corrections of at least 20%) over the last 40 years as well as the impressive price increases just one year after the stock market dives. *This column shows how high the price is after 1 year of recovery above or below the high since the start of the drawdown. (Source: MSCI World, financial flow, own calculation)

Interim conclusion: Short-term speculation is not our thing. That’s why our rule is: If we take out a Lombard loan at all, then only when share prices are well below their all-time high and – in Stefan’s case – when interest rates are moderate.

When is the ideal time to repay Lombard loans?

In Switzerland, mortgage debt is usually not repaid in full. What about Lombard loans?

Based on what is, for us, the key insight regarding Lombard loans – namely that in the past above-average recoveries set in only one year after market slumps (see table above) – we have developed a strictly rule-based exit strategy. This set of rules comprises the following three rules:

• Rule no. 1:
  Based on the pledged securities, the custodian bank should grant Lombard loans up to a maximum LTV of 50% or higher . (Reason: the higher the maximum LTV granted by the bank, the more safety margin you have in a market crash.) 
• Rule no. 2:
  Borrowing is staggered, with a maximum of three tranches when prices are 25% (up to LTV 20%), 40% (LTV 30%) and 50% (LTV 40%) below the last all-time high of the MSCI World Index, a comparable index or an ETF based on it.
• Rule no. 3:
  Repayment of the loan, on the other hand, always takes place in full once the last all-time high is reached again, i.e. after price recoveries of 33%, 67% and 100%.

These three rules ensure that even in an extreme stock market crash of 60%, there is no risk of a forced sale at the worst possible moment due to a “margin call”.

In the table below, we have played through four exit scenarios S1 – S4 with their respective repayment dates.

This is how to read the table: if there is a price correction of 25% (to <40%), it is scenario 1 (S1). If there is a price correction of 40% (to <50%), it is scenario 2 (S2). Scenario 2 includes all the white rows above it, i.e. also the first three of S1. The same applies to the extreme scenarios 3 and 4, which cover massive price losses of 50% and 60% respectively and will therefore occur very rarely. Each scenario is highlighted in green and consists of two events (separate rows): price recovery to the peak and loan repayment.

Once again, we have assumed that the custodian bank grants Lombard loans up to a maximum LTV of 50%. If this threshold is exceeded, a forced sale looms, i.e. a margin call occurs.

Anyone who wants more safety margin in a price correction of -60%, i.e. wants to keep the LTV below 50%, skips the 3rd loan at a price correction of -50%. With this simple measure, a stock market crash of 60% would result in an LTV of 45% (instead of 50% as in the table).

So what does this mean for your return? Below, we have compared the return on equity in scenario 1 (S1) with the return without credit leverage. Note that we use the same equity in both calculations, namely the equity at the time the loan is taken out. We have also assumed borrowing costs of 3% and a loan term of 1 year.

Calculating return on equity WITHOUT credit leverage

Equity invested = CHF 75,000 (portfolio value at the same time as when the loan is taken out)

Price gain = CHF 25,000 (CHF 100,000 – CHF 75,000)

Return on equity = 33.3% (CHF 25,000 / CHF 75,000 = gain / equity invested)

Calculating return on equity WITH credit leverage

Equity invested = CHF 75,000 (value of equity at the time the loan is taken out)

Price gain = CHF 31,250 (CHF 125,000 – CHF 93,750)

Borrowing costs p.a. = CHF 563 (= CHF 18,750 * 3%)

Gain after borrowing costs = 30,687 (= CHF 31,250 – CHF 563)

Return on equity = 40.9% (= 30,687 / 75,000 = gain / equity invested)

What are the advantages and disadvantages of Lombard loans?

As mentioned, you can use the additional liquidity you get from a Lombard loan for different purposes. If, for example, you “spend” the loan on consumption, the main advantage is that you don’t have to sell your securities to get the cash you need. You also usually benefit from lower interest rates than with a personal loan.

Here, however, we’re only interested in Lombard loans that are invested in additional securities. The advantages and disadvantages listed reflect our subjective opinion and should be understood in comparison with a classic, unleveraged investment.

What leverage alternatives are there to a Lombard loan?

Below, we present two other ways to invest with leverage. 

Alternative 1: leverage through leveraged ETFs

With this option, you invest in special leveraged ETFs which, like classic ETFs, track an index, but amplify its price movements by a certain factor. For example, if the factor is two and the reference index rises by 2% in one day, the leveraged ETF shoots up by 4%. Unlike with a Lombard loan, a leveraged ETF gives you no additional liquidity, and the range on offer is still fairly limited. Nevertheless, we find the concept behind leveraged ETFs exciting, which is why we will devote a separate article to this investment option.

Alternative 2: leverage through structured products

Leveraged structured products are complex financial products that let you respond to price movements of the underlying asset. Popular underlyings are individual shares, indices, commodities and currencies. We reject leveraged structured products because, in our opinion, they are too expensive and not transparent enough. The latter shows in particular in their often opaque structure. 

Conclusion

It’s obvious: taking out a securities-backed loan is only suitable for investors with strong nerves and should be well thought through. After all, the leverage that comes with borrowing works both ways: both price gains and price losses are amplified. On top of that, loan interest rates can rise at short notice, which can put your nerves under even more strain.

What’s more, you should only consider a Lombard loan if you have already invested your available cash or other, cheaper equity.

If you’re aware of these points, you should now arm yourself against the risks that come with a Lombard loan.

And that brings us back to our opening thought experiment. Unfortunately, investing with borrowed money is not a no-brainer, even though long-term stock market returns are likely to be higher than the interest on Lombard loans – especially in our home currency, CHF.

Because, unlike with ETFs financed with your own money, with credit-financed securities you can’t simply sit out sharp price losses in the tried-and-tested buy-and-hold manner. The reason for this is the margin call, i.e. the associated risk of having to sell your securities at the worst possible moment.

To avoid the financial losses associated with a margin call, you should never fully use the credit line granted by the bank. This gives you an important safety margin – and calmer nights.

You should also make sure that your interest costs don’t get out of hand. Specifically, this second safety measure could be to estimate the expected interest costs conservatively, based on sound budgeting (i.e. with a safety margin, or a high imputed interest rate of 5%). Another measure against high interest costs could be to set yourself an interest rate limit when taking out the loan. 

Final conclusion: Credit-financed equity ETFs boost your return on equity when prices rise. A Lombard loan becomes playing with fire for you if you haven’t taken any rule-based safety precautions – and therefore stumble into a margin call.

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Updates

2025-08-17: Updated the margin rates for Lombard loans from DEGIRO, Interactive Brokers and Swissquote and added the rates from Saxo Bank.

2025-01-14: Updated the margin rates for Lombard loans from DEGIRO, Interactive Brokers and Swissquote.

2024-07-02: Updated the margin rates for Lombard loans from DEGIRO, Interactive Brokers and Swissquote.

Disclaimer

Transparency note: Unlike Stefan, at the time this article was published Toni had leveraged his portfolio with a Lombard loan, namely from Interactive Brokers. Before that, both had gained their first experience with Lombard loans from DEGIRO.

Disclaimer: Investing involves risks. You have to decide for yourself whether or not you want to take these risks.

Errors excepted: We have written this article to the best of our knowledge and belief. Our aim is to provide you, as a private investor, with the most objective and meaningful information possible on all things finance. Should we nevertheless have made mistakes, forgotten important aspects or if information is no longer up to date, we would be grateful if you let us know.