And the winner is... GEAR 

If you don’t like rollercoasters don’t buy a ticket.  

GEAR (BetaShares Geared Australian Equity Fund) is an option for those that want to amplify their investment earnings but can wear the downsides.  Be warned, it’s not for the squeamish and should not be entered into on a whim. But for those who understand the effects of gearing and want an index fund on steroids it’s worth considering and that’s why it’s under our ETF spotlight.   

What Betashares Says 

Objective: 

GEAR provides investors with cost-effective geared exposure to the returns of the broad Australian sharemarket.

Strategy: 

The Fund is ‘internally geared’, meaning all gearing obligations are met by the Fund.   The Fund combines funds received from investors with borrowed funds and invests the proceeds in a broadly diversified share portfolio consisting of the largest 200 equity securities on the ASX by market capitalisation.  The Fund’s gearing ratio (being the total amount borrowed expressed as a percentage of the total assets of the Fund) is managed between 50-65%.

Key benefits: 

• Provides easy access to leveraged returns within the Australian Share market. 

• Avoids the costs and complications of applying for an investment loan.    

• No Margin Calls 

• SMSF Friendly.  One of the easiest ways to introduce gearing into your superannuation fund. 

What The ETF Guy Says

GEAR is one of my favourite ETFs, one that I am invested into personally and have recommended often….recommended to the right type of person that is.  If an investor is going to enter GEAR they really need to know how gearing into equities works and what to expect when using it. 

What type of investor does GEAR suit? 

Gearing into any investment magnifies gains and losses. Share market movements can be quick and decisive.  This isn’t an investment you invest short term cash into.  In my opinion this is classic sit and hold ETF, to be used in that part of the portfolio that is not going to be touched, rain or shine, for a lot of years to come.  Think superannuation for a young person 20 years away from accessing super, a SMSF with a long time frame, in the long term bucket for a savvy retiree or maybe as a have in the back ground saving vehicle with a dividend reinvestment plan going.     

Why am I a fan of GEAR?  

Mainly because I like gearing as an investment  strategy. 

Gearing allows an investor to control more assets than their personal resources allow.  With GEAR you are putting a $1 and Betashares are borrowing a dollar or more that they add to your investment.  The current Loan to Value Ratio (LVR) is 57%, they can go up to 65% in the right conditions. (Tip: If you don’t have your head around what a LVR is and its significance in investing then you shouldn’t be investing in GEAR.  

Another reason is the interest rate. It’s low, Betashares doesn’t advertise the internal interest rate on its website, but I am tipping it’s a cheaper rate than the average investor can find.  GEAR accesses commercial rates for its lending so it’s going to be cheaper than any margin loan you are going to get or most home equity loans as well. 

Ease of Entry.  On top of controlling more assets and a lower interest rate the lack of an application process is a clear winner.  If you have a share broking account, you purchase can GEAR.  No credit checks, no serviceability questions, no adverse crediting rating issues or anything like that…. nor should there be when the dividends are being used to pay off the interest cost prior to the investor receiving them. 

Another thing you will not see is the dreaded Margin Call, the investor is not going to get asked to pay down the loan or add more security if the share market drops. Betashares takes care of that within the fund. Yes, you will see the fund fall in value but that’s gearing.  

Conclusions

Being able to gear into the market, without having to refinance the home or adding your own assets as security and no fear of a margin call makes this the easiest gearing strategy you are going to come across….. only if you can accept the added volatility though. 

Sorry to harp on but gearing adds volatility to an investment. You know what they say “If you can’t take the heat stay out of the kitchen”.  

Disclaimer: The purpose of this article is to provide general information only.  It should not be relied upon as personal financial advice.  The ETF Guy strongly recommends investors consult a financial adviser prior to making any investment decision.  While all care was taken at the time of writing I make no representations as to the accuracy, completeness, suitability, or validity, of any information contained within.