What are inverse ETFs and short funds?

These are funds that seek to provide ‘short’ exposure to the sharemarket. They provide investors with the opportunity to profit from, or protect against falling sharemarkets.

In broad terms, inverse/short funds aim to provide returns that are negatively correlated to a specified sharemarket. They are designed to go up in value when the market goes down, and down in value when the market goes up.

Inverse/short funds are also sometimes known as ‘Bear funds’. Betashares manages three Bear funds:

BEAR Australian Equities Bear Hedge Fund BBOZ Australian Equities Strong Bear Hedge Fund BBUS U.S. Equities Strong Bear Hedge Fund – Currency Hedged

 

It is important to understand what is meant by ‘inverse’ or ‘short’ exposure.

The term ‘inverse’ is sometimes (incorrectly) taken to mean that the Fund will return the exact opposite of the underlying sharemarket, over any period of time. In other words, that an inverse fund negatively tracks a particular index. Or in simple terms, that an inverse fund produces the ‘mirror image’ of an investment in the index. Taking this view, if the sharemarket fell by 10% over a month, the inverse fund would rise by 10%.

This is not the case, in Australia at least!

Inverse/short funds do not aim to produce the exact opposite of an index’s return over any period.

‘Inverse’ and ‘short’ mean that the fund aims to produce returns that are negatively correlated with a specified index – but the Fund does not aim to produce the exact ‘opposite’ of the index returns.

How do inverse ETFs and short funds work?

Returns that showed a perfect, 100% negative correlation with an underlying index over an indefinite period of time would only be possible from a fund that achieved its short exposure by short-selling the shares in the underlying index.

This is not how inverse/short/bear funds work.

These funds achieve their short exposure by selling futures contracts, not by short selling the underlying shares. They also typically rebalance their short exposure periodically to keep the level of short exposure within a specified range. As a result, short funds do not aim to produce the exact opposite of the index’s return over time.

The Betashares Bear funds achieve their short exposure by selling share index futures contracts. They are not designed to provide the exact opposite of a relevant benchmark return on a given day. Investors should instead expect a return that falls within a specified range on a given day (and not over any longer period), as described below.

See here for an in-depth explanation on how the Betashares Bear funds work, and how their prices are determined.

See here for information on the features, benefits and risks of Betashares’ Bear funds.

Bear funds available on the ASX

Betashares offers three Bear funds:

BEAR Australian Equities Bear Hedge Fund
  • Short exposure to the Australian market
  • Seeks to provide returns that are negatively correlated to the Australian sharemarket (as measured by the S&P/ASX 200 Accumulation Index) on any given day
  • Exposure aims to be between -0.9x to -1.1x the Index on any given day
BBOZ Australian Equities Strong Bear Hedge Fund
  • Geared short exposure to the Australian market
  • Seeks to provide magnified returns that are negatively correlated to the Australian sharemarket (as measured by the S&P/ASX 200 Accumulation Index) on any given day
  • Exposure aims to be between -2x to -2.75x the Index on any given day
BBUS U.S. Equities Strong Bear Hedge Fund – Currency Hedged
  • Geared short exposure to the US market
  • Seeks to provide magnified returns that are negatively correlated to the US sharemarket (as measured by the S&P 500 Total Return Index) on any given day
  • Exposure aims to be between -2x to -2.75x the Index on any given day

The Australian Bear Funds sell futures that reflect Australia’s benchmark S&P/ASX 200 Accumulation Index (known as SPI 200 futures), while BBUS sells futures that reflect the S&P 500 TR Index.

As a result, the market prices of the Funds on the ASX reflect futures prices – not the price level of the physical sharemarket index.

Typically, equity index futures prices and the relevant sharemarket index move in parallel, and so in the hours when the sharemarket is open, price movements in the Bear Funds will generally reflect movements in the physical sharemarket.

However, trading hours for the sharemarket and the futures market are different. Futures markets operate almost around the clock even when sharemarkets are closed. When the sharemarket is closed, futures prices continue to move, and can therefore affect the values of the Bear funds.

It’s important to flag that during periods of volatility, these moves can be significant – particularly in the case of BBUS, given the different timezone the US sharemarket operates in.

Why are the Bear funds rebalanced?

BEAR aims to provide returns that have a correlation of between -90% and -110% with the Australian sharemarket on a given day.

BBOZ and BBUS seek to provide returns that have a correlation of between -200% and -275% with the Australian or US sharemarket respectively on a given day.

As the underlying market moves, and the value of the fund changes, the fund’s gearing level changes. If the gearing moves outside the target range, the fund’s exposure will be rebalanced to bring it back within the target range.

Advantages and risks

Tips for using Bear funds

  • Don’t set and forget – keep an eye on your position daily
  • Read the PDS and TMD
  • Seek professional advice

How do you buy a Bear fund?

You can buy or sell units in Betashares Bear funds just like you’d buy or sell any share on the ASX.

All three of the Betashares Bear funds require no minimum investment (subject to broker requirements).

The Bear funds’ strategies of seeking returns that are negatively correlated to market returns is the opposite of most managed funds. Also, gearing in BBOZ and BBUS magnifies gains and losses and may not be a suitable strategy for all investors. Investors in geared strategies should be willing to accept higher levels of investment volatility and potentially large moves (both up and down) in the value of their investment. Geared investments involve significantly higher risk than non-geared investments. Investors should seek professional financial advice before investing, and monitor their investment actively. An investment in any of the Funds should only be considered as a component of an investor’s overall portfolio. The Funds are actively managed and do not track a published benchmark.