Getting tactical with exchange traded products | BetaShares

Getting tactical with exchange traded products

BY David Bassanese | 27 September 2016
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When it comes to exchange traded products (“ETPs”), the common perception among many investors is that they are cost-effective investments that can form part of one’s long-term core portfolio holdings.  But given the widening range of funds now available on the ASX, investors should also appreciate ETPs are also handy trading tools in their own right for more active investors seeking to trade specific global investment themes or even specific events.


The more active use of ETPs by investors is clearly evident in the strong growth in ETP monthly trading volumes, which have increased from just over $500m per month in mid-2012 to $2.3 billion in August 2016.

So what kind of tactical trades can be implemented using ETPs?

Trading overall market direction

For starters, let’s say you develop a view that the equity market is over extended and set for a correction. With the BetaShares Australian Equities Bear Hedge Fund (ASX Code: BEAR), for example, you can seek to profit from, or protect against, a market decline as the Fund is designed to be negatively correlated to the returns of the Australian equity market.  On any given day, for example, BEAR aims to rise by broadly the same percentage magnitude in value that the market declines, and vice-versa[1] (but it should not be expected to provide the exact opposite of the market return over any time period).

BetaShares also offers a “Strong Bear” variant (ASX Code: BBOZ) which aims to rise by around 2 to 2.75%, on any given day, for every 1% decline in the market, and vice versa. And there’s also the U.S. Equities Strong Bear Hedge Fund (ASX: BBUS), offering similar negatively correlated (currency hedged) exposure to the S&P 500 Index.

Going the other way, if you develop a short-term bullish view on the market, the BetaShares Geared Australian and US Equity Hedge Funds (ASX Codes: GEAR and GGUS respectively) seek to provide gains of around 2 to 2.75% on any given day in which the market rises by 1% – and vice versa.

Note these geared funds are able to borrow at relatively cheap wholesale rates generally unobtainable by retail investors. And being internally geared, they don’t subject investors to any margin calls.

Geographic & sector equity tilts

Another way to tactically trade the equity market is through geographic or industry tilts. Again, there is now a wide range of ETPs providing specific exposure to certain countries or regions, including the United States, Europe, Japan, Asia and emerging markets.  BetaShares offers exposure to the broad US equity market, the US Nasdaq-100 Index, and the Japanese and European equity markets – with the latter two funds currency hedged.

It’s now also possible to tilt equity market exposure in favour of certain global sectors.  BetaShares, for example, recently launched a suite of funds which each provide exposure to the leading global companies in sectors such as healthcare, agriculture, cybersecurity, energy, gold mining and banking.

Currencies & commodities

Currencies are another option. Again, the beauty of using ASX traded funds to trade currencies is that it can all be handled on the single ASX platform and there’s no embedded leverage involved.  Investors are now able to take views on trends in the US dollar, Euro and even the British Pound against the Australian dollar.

Last, but not least, there are now also multiple options to trade commodities through ETPs, with Funds covering gold, oil, even agricultural prices (corn, wheat, soybeans & sugar).  Indeed, trading in oil and gold funds is becoming increasingly active, with investors taking views on the latest twists and turns among oil producers and central banks.

All up, ETPs can be – but need not just be – buy and hold investments bedded down in your long-term portfolio.  The broadening range of funds now available also allow more active investors to take short-term tactical positions across many different global markets.

Please note: The Bear and Strong Bear Funds’ strategies of seeking returns that are negatively correlated to market returns are the opposite of most managed funds.  Also, gearing is used in GEAR, BBUS and BBOZ which 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 Geared, Bear and Strong Bear Funds are actively managed and do not track a published benchmark.

[1] This negative correlation is achieved by the Fund maintaining a short SPI futures exposure broadly equal to its funds under management.

 

4 Comments

  1. b0b555  |  February 19, 2017

    I’m fairly comfortable that I have a sufficient understanding of the price of a geared fund (GEAR for example) and how the movements up and down are magnified.

    Do you have a reference that examines how the dividend yield might be affected by these up and down movements? Are they also magnified? Or would the dividend yield remain more consistent and steady?

    1. Ilan Israelstam  |  April 4, 2017

      Hi there. The impact of gearing will not affect the yield’s volatility, and it should remain fairly stable. It will be impacted by the overall level of gearing in the fund. GEAR’s 12 mth distribution yield on a trailing basis is currently 5% p.a. with a gross yield of 6% p.a.

  2. b0b555  |  March 7, 2017

    I’m fairly comfortable that I have a sufficient understanding of the price of a geared fund (GEAR for example) and how the movements up and down are magnified.

    Do you have a reference that examines how the dividend yield might be affected by these up and down movements? Are they also magnified? Or would the dividend yield remain more consistent and steady?

    1. Isaak Walkom  |  May 28, 2018

      Great question and apologies for the delay in getting back to you.
      Distributions and franking will also be magnified.
      In keeping with your example of GEAR, lets assume a Gearing Multiple of 2.00x The franking level for the fund will be twice the level of the S&P/ASX 200. Distributions will also be magnified, but will not be double as a result of interest payments that will be paid as a result of the borrowing within the fund.
      Distribution and franking information can be found on the relevant fund page on our website, GEAR’s Yield Information can be found here: https://www.betashares.com.au/fund/geared-australian-equity-fund/
      If you have any further questions, please feel free to contact BetaShares Client Services on 1300 487 577.
      Kind Regards

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