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I bought an ETF on the ASX – GEAR – at $17.83. Given most experts expect the ASX to improve to 5,800 to 6,000 points this year, this should outperform the main index, but are there any downsides to owning a geared ETF? I can’t really see any myself, the only downside I see is the lack of liquidity compared to ETFs in the US Market.
A: Thanks for the question.
There aren’t any downsides other than those you have mentioned – lack of liquidity and of course, like any geared product, you multiply your investment profits or losses.
The GEAR ETF from Betashares (ASX Code GEAR) has a target gearing ratio of around 55% - so if the market goes up by 1%, your portfolio should go up in value by around 2.3%. Conversely, if the market falls by 1%, your portfolio will fall in value by around 2.3%.
I would offer the following comments on the GEAR ETF:
a) It is a very new ETF and liquidity is still limited;
b) Performance so far has been a little disappointing. Although the time period since inception is only 8 months (and not an appropriate period to make meaningful performance commentary), the GEAR ETF returned -0.42% compared the S&P/ASX 200 Accumulation Index of 1.62% (period to 31 December 2014); and
c) Management fees of 0.74% pa are arguably on the high side for an ETF.
