In the current unpredictable market, investors frequently look for ways to safeguard their portfolios
\nInverse ETFs offer a simple way to hedge against market drops, unlike shorting individual stocks
\nStockhead reached out to Cameron Gleeson, a Senior Investment Strategist at Betashares\u00a0<\/p>\n
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In today\u2019s volatile landscape, investors are constantly grappling with the challenge of protecting their investments from market downturns, while still aiming for potential gains.<\/p>\n
Amidst this backdrop, Inverse or Short Exchange-Traded Funds (ETFs)<\/strong> have emerged as a strategic tool for investors to hedge against falling markets.<\/p>\n While shorting individual stocks is tricky and limited for retail investors like you and me, inverse ETFs (sometimes called \u2018bear funds\u2019) provide a simpler and more accessible way to profit from a falling market.<\/p>\n In simple terms, inverse\/short funds aim to provide returns that are negatively correlated to the sharemarket.<\/p>\n So, when the Aussie market takes a dive, these ETFs deliver gains, acting as a buffer or hedge against those market downturns.<\/p>\n These funds achieve their short exposure by selling sharemarket index futures contracts, such as the ASX200 index futures.<\/p>\n We\u2019ll explain more shortly, but first, it\u2019s important to understand what is meant by \u2018inverse\u2019 or \u2018short\u2019 exposure in the context of inverse ETFs.<\/p>\n Investors sometimes mistakenly believe that \u2018inverse\u2019 means the fund will perfectly mirror the opposite movement of the market ie; if the market goes down, they expect the inverse fund to go up by exactly he same amount.<\/p>\n But this isn\u2019t how it works, at least not in Australia.<\/p>\n \u00a0<\/p>\n In a recent chat with Stockhead<\/em>, Cameron Gleeson, a senior investment strategist at Betashares<\/strong>, elaborated on this point.<\/p>\n Gleeson noted that while inverse funds move in the opposite direction of a specific index, they may not always precisely mirror its movements.<\/p>\n Instead, these funds typically fluctuate within a narrow range relative to the Index.<\/p>\n For instance, if the ASX200 index falls by -1%, a simple inverse ETF could move higher by anywhere between +0.9% and +1.1% \u2013 and vice versa.<\/p>\n \u201cThis is because the ETFs use futures contracts to achieve short exposure, which are then marked to market daily,\u201d explained Gleeson.<\/p>\n \u201cThis means that the value of the futures contracts is adjusted to reflect the current market prices. These adjustments can result in variations in the ETF\u2019s exposure to the index.\u201d<\/p>\n To ensure that the intended level of short exposure is maintained within the specified range, a rebalancing may need to be made to the positions held within the ETFs.<\/p>\n \u201cIf the market moves significantly in one direction, the ETF\u2019s exposure may need to be adjusted to stay within a specified range. This rebalancing can lead to fluctuations in the ETF\u2019s returns,\u201d added Gleeson.<\/p>\n \u201cAs a result, short funds do not aim to produce the exact opposite of the index\u2019s return.\u201d<\/p>\n \u00a0<\/p>\n At the moment, Betashares offers<\/a> three inverse or short ETFs on the ASX:<\/p>\n \u00a0<\/p>\n Australian Equities Bear Hedge Fund (ASX:BEAR)<\/strong><\/a><\/p>\n BEAR is an inverse fund that aims to generate returns that are negatively correlated to the returns of the S&P\/ASX 200 Index.<\/p>\n When the index drops, the fund expects to gain, and when the index rises, it expects to decline.<\/p>\n Typically, if the ASX200 falls by 1% in a day, the BEAR fund might rise by around 0.9% to 1.1%.\u00a0Conversely, if the market goes up, the fund may decrease in value by anywhere in that range.<\/p>\n The fund\u2019s portfolio is actively monitored by Betashares to ensure its exposure stays within that specific range each day.<\/p>\n However, over longer periods, the returns might not align due to rebalancing and compounding effects. These differences can be more significant in volatile markets and over-extended holding periods.<\/p>\n \u00a0<\/p>\n Australian Equities Strong Bear Hedge Fund (ASX:BBOZ)<\/a><\/strong><\/p>\n The BBOZ fund is similar to the BEAR fund, but the main difference is that BBOZ is leveraged, meaning it seeks to generate magnified returns.<\/p>\n The BBOZ fund\u2019s portfolio exposure is actively monitored and adjusted by Betashares to stay within a -2x to -2.75x range on any given day.<\/p>\n Therefore unlike the BEAR fund, a 1% fall in the ASX200 on a given day can generally be expected to deliver a 2% to 2.75% increase in the value of the BBOZ fund.<\/p>\n Conversely, if the market goes up by 1%, the fund may decrease in value by anywhere in that range.<\/p>\n \u00a0<\/p>\n U.S. Equities Strong Bear Hedge Fund \u2013 Currency Hedged (ASX:BBUS)<\/a><\/strong><\/p>\n The BBUS ETF also seeks to generate leveraged returns, but instead of the ASX, the fund is negatively correlated to the returns of the US sharemarket.<\/p>\n A 1% fall in the U.S. S&P 500 Total Return Index can generally be expected to deliver a 2% to 2.75% increase in the value of the Fund.<\/p>\n Conversely, if the S&P 500 goes up by 1%, the fund may decrease in value by anywhere within that range.<\/p>\n The Fund\u2019s portfolio exposure is actively monitored and adjusted by Betashares to stay within that -2x to -2.75x range on any given day.<\/p>\n \u00a0<\/p>\n Typically, one of the main downsides of shorting stocks or trading futures is that you have to deal with margin calls.<\/p>\n So, a big advantage of investing in any of these three Betashares\u2019 ETFs is that you never have to worry about getting a margin call.<\/p>\n \u201cThe Betashares Inverse ETFs offer convenience for investors, in that we take care of a lot of the mechanics like margin calls, which are very difficult to manage on your own,\u201d said Gleeson.<\/p>\n \u201cRemember also that your exposure here is to the whole market, not to a single stock.<\/p>\n \u201cI would say that inverse ETFs can be a really cost efficient way of doing this without without the hassle and cost of, for example, opening up your own futures trading account.\u201d<\/p>\n There are however several things that investors should be mindful of.<\/p>\n For instance, the stock market and futures market have different trading hours. While the stock market has set hours, futures markets run 24\/7.<\/p>\n Although futures prices typically move in line with stock market index prices during regular trading hours, they can deviate outside of these hours, especially during volatile times.<\/p>\n Futures prices usually reflect any news or events that happen during these periods, which can offer clues about where the stock market might open the next day. This difference in trading hours can sometimes work in favour of, or against investors.<\/p>\n Finally, while inverse ETFs offer a convenient way to hedge against market volatility, they come with their own set of complexities and risks.<\/p>\n \u201cThese inverse funds come with associated risks due to the fact that they have a degree of gearing,\u201d Gleeson warned.<\/p>\n \u201cThey\u2019re definitely not like your traditional buy-and-hold ETFs. There\u2019s a very specific use case that these funds are for.<\/p>\n \u201cSo they may not be appropriate for all investors, and people should take care to read and understand the mechanics of the fund and how they work.\u201d<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n\n \ufeff<\/span><\/span>\u00a0<\/p>\n \u00a0<\/p>\n The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.<\/em><\/p>\n Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.<\/em><\/p>\n <\/span><\/p>\n The post Want to limit your losses when the market drops? There\u2019s an ETF (or three) for that<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"How Inverse Funds react to market movements<\/h2>\n
Betashares currently offers 3 inverse funds<\/h2>\n
Other things you need to know about Inverse ETFs<\/h2>\n
ETF prices today:<\/h2>\n