What are margin loans? Plus some alternatives

The risks of margin loans

While margin loans offer the potential for higher returns, the potential risks are important to note:

• Margin calls can force unplanned sales: If the market drops suddenly, investors may be forced to sell assets at a loss to meet margin calls.
• High interest costs reduce profitability: Margin loan interest rates tend to attract a higher interest rate than many other ways of borrowing to invest, reducing overall returns.
• Credit assessment and loan rejections: Margin loans require a credit check and approval isn’t guaranteed.
• Emotional stress: The risk of forced liquidation can make margin lending a stressful investment strategy, especially in volatile markets where investors are seeing losses exacerbated by the use of gearing. As such, investors need to monitor their account regularly to ensure it remains in good standing.
• Sudden LVR changes: Lenders control Loan-to-Value Ratios (LVRs) of individual securities and can change them at any time, meaning a previously eligible position may no longer qualify for a margin loan which may have sudden implications for the level of cash investors need to have in their account.

Wealth Builder ETFs: A smart margin loan alternative

Unlike margin loans, where investors borrow personally, Betashares Wealth Builder ETFs use internal borrowing within the fund. This means:

• Investors don’t need to take on personal debt.
• No credit checks or loan applications are required.
• No margin calls – investors are never forced to deposit extra capital.

LVR and market exposure in Wealth Builder ETFs

Betashares Wealth Builder ETFs typically maintain an LVR of 30-40%, meaning they provide market exposure of ~143% to 167% of the fund’s Net Asset Value (NAV).

This controlled leverage ensures enhanced returns while reducing the likelihood of severe losses compared to margin loans, which often have a higher LVR.

Why Wealth Builder ETFs are an attractive alternative to margin loans

• No personal borrowing or credit risk: Unlike margin loans, investors don’t take on debt themselves – the ETF issuer handles borrowing within the fund.
• No margin calls: Because the borrowing happens internally, investors are never forced to sell assets to cover loan requirements.
• Cost-effective leverage: Instead of paying interest directly for a margin loan, the cost of leverage is embedded in the ETF’s structure, potentially resulting in lower interest as a fund issuer can use its scale to negotiate better rates with lenders.
• Simple and accessible: No complex applications, loan agreements, or paperwork – just buy and sell the ETF like any other investment.
• Diversified and professionally managed: The leverage on Betashares Wealth Builder ETFs is monitored to ensure gearing levels stay within acceptable limits, and the funds are invested in a diversified manner.

Risks of Investing in Wealth Builder ETFs

While Wealth Builder Geared ETFs offer a structured and simplified way to access leveraged market exposure, they also come with inherent risks that investors should carefully consider. These risks include (but are not limited to):

• Amplified market volatility: Since these ETFs use internally managed borrowing, their value can fluctuate more than traditional ETFs. In rising markets, this leverage can enhance gains, but in declining markets, losses are also magnified.
• Interest costs and borrowing risks: The fund’s internal borrowing incurs interest costs, which are reflected in the ETF’s performance. If market conditions lead to higher borrowing costs, returns could be affected.
• Potential for underperformance in flat or down markets: If the underlying assets don’t perform strongly, the cost of leverage may lead to lower net returns compared to an unleveraged ETF. In prolonged market downturns, compounded losses can be greater than those of traditional ETFs.

Who should consider geared ETFs?

Betashares Wealth Builder ETFs may be suitable for:

• Growth investors seeking amplified returns.
• Investors looking to avoid personal debt or margin calls.
• Investors with very high risk tolerance.
• Long-term investors who want leveraged exposure without active loan management.
• Investors looking for diversification through a structured ETF vehicle.

How to get started with geared ETFs

1. Research Betashares Wealth Builder ETFs: Understand their strategy, LVR, and risk profile.
2. Choose a platform: Buy the ETF through a brokerage account or investing platform such as Betashares Direct.
3. Monitor your investment: Track your portfolio to ensure you stay within your desired asset allocation ranges, but focus on the long term and avoid panic during volatility.
4. Consider Dollar-Cost Averaging (DCA): Spread risk by investing gradually over time.

Margin Loans vs. Wealth Builder ETFs: A Comparison

Let ETFs do the work for you

For investors seeking leveraged returns without the pitfalls of margin lending, Betashares Wealth Builder ETFs offer a simple and cost-effective solution. With no personal borrowing, no margin calls, and built-in leverage, these ETFs provide an efficient pathway to enhanced investment returns.

If you’re considering margin lending, ask yourself: why take on the risks of margin calls and personal loans when an ETF can do the work for you?

Betashares Wealth Builder range: