In a previous post for our Portfolio Construction series we explored the concept of a ‘risk-on/risk-off’ investment strategy and dynamic asset allocation (DAA) as a way to attempt to position portfolios for markets with different levels of perceived risk. In this post, we look at some specific BetaShares tools that investors have used as part of DAA strategies:
The “risk on/risk off” approach seeks to overcome the problems of sequencing risk – and the downside risk of market crashes generally – by better timing the entry and exit into riskier assets like shares, property, and even fixed income.
“Dynamic asset allocation” is the term which describes this process. DAA aims to reduce and increase risk by either selling assets (and placing the proceeds into a liquid cash instrument) or – when markets are deemed to be improving – by using the money in that cash deposit to buy back into the investor’s chosen risky assets.
BetaShares has a range of products available which can be suitable for building a diversified portfolio. However, two BetaShares’ funds offer specific features which allow them to be of particular benefit to DAA investors:
- The BetaShares Australian High Interest Cash ETF (ASX code: AAA) is a useful vehicle for holding cash deposits in the “risk off” phase of DAA. This ETF aims to outperform the RBA cash rate, while at the same time investing solely in cash deposits with banks in Australia. As at the time of writing (October 2014) the variable rate earned on AAA’s cash deposits is a full 0.79% above the RBA cash rate (after fees). Like all of our ETFs, AAA is quoted on the ASX and purchases and sales can be made during normal ASX trading hours. By holding cash exposure within the broking system, new share investments can be made at any time and funded by simultaneously selling AAA holdings, as both trades would normally settle at the same time
- The BetaShares Australian Equities Bear Hedge Fund (ASX code: BEAR) is an interesting way to reduce long equity market exposure without having to sell physical shares. The fund is designed to go up in value when the broad Australian share market falls and vice versa. Because this reduces long sharemarket exposure without physically selling shares, using the BEAR fund can potentially be more tax effective than selling shares, and generating what might be a high level of taxable capital gains. Of course, with BEAR, you would need to be prepared to accept the risk of your investment going down in value if, in fact, the sharemarket goes up.
The trend to using exchange traded funds as part of DAA investing is taking hold around the world, with more Funds becoming available as specific components of portfolios whether they are in the ‘risk on’ or ‘risk off’ phase. This is just another way that exchange traded funds are becoming more sophisticated tools for investment.