Review: BetaShares’ new BEAR fund

Co-founder of the Switzer Super Report
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Feeling bearish? Do you want to protect any of those hard won gains?

I’m not in this camp, but while trying to maintain a long-term positive conviction on the market, it’s pretty tough out there. If you are ‘cold’ and around your target weighting in Aussie equities, a new ‘product’ from BetaShares may appeal to you.

It is not actually a product – however it is a first of its kind in Australia. BetaShares has launched the first managed fund that allows investors to profit from, or hedge against, a decline in the value of the Australian equities market. It is an exchange traded fund listed on the ASX, which appropriately has the ASX code ‘BEAR’.

It’s a pretty simple idea. The fund obtains a short exposure by investing in futures and options contracts over the S&P/ASX200. As these are leveraged instruments, it uses your cash to pay for any margins, and sticks the vast bulk (about 90%) into the bank.

The fund’s NAV (Net Asset Value) should very closely correlate with the movement in the market as a whole. If the S&P/ASX200 falls by 1%, the fund’s NAV should increase by 1% from (approximately) $24.40 to $24.64 – and if the market rises by 1%, the NAV will decrease by 24c to $24.16. That’s the theory – it will depend on how well the Manager is ‘managing’ it.

What I like

  • Simple idea – and elegantly structured;
  • Good liquidity and tight spread. We have been watching the ‘market making’ spread (it is an ETF that you buy or sell on the ASX), and most of the time, it has been 3c between bid and offer on good volume (3c translates to 0.12%);
  • It is not leveraged. While the fund trades in derivatives contracts that are leveraged, the Fund’s PDS says that it will maintain an exposure such that its correlation with the S&P/ASX200 is in the range of 0.9 to 1.1; and
  • BetaShares publishes on their website what they call an “iNAV” – an indicative NAV of the fund updated every 60 seconds – so you can compare the market “bid/offer price” with what the fund should actually be worth.

What I don’t like

  • While there is no benchmark, the management fee of 1.19% pa charged by BetaShares looks high. There are also expense recoveries of 0.19%pa – so it is 1.38%pa all up. Expect this number to be crunched if the EFT gains some traction and a competitor comes into the market;
  • The PDS says the fund may pay a distribution, and then only at least annually. This is understandable as the manager may not get the correlation right (although this should be reflected in the NAV), and then there are the management fees and investment costs. That said, at least 90% of the fund is invested in cash earning around 4% – so perhaps a harder commitment on distributions could have been made.

For Traders?

Maybe – depends on just how much you expect the market to move. By the time you pay brokerage to buy and sell the units, and then pay the market maker’s bid/offer spread, you are up for at least 0.32% in transaction costs – and in many cases, even higher.

For hedgers and position takers

Putting aside the management fees, an easy way to hedge the market risk on a portfolio of shares (not the specific stock risk), or to take a medium term view that the equities market will decline. Due to dividends and tax advantages to a SMSF, and the lack of commitment about a distribution from the fund (we will assume 2.0% pa), your effective holding cost in accumulation with a short position is around 3.5%pa – so if you held the position for a year, the index would need to fall by around 150 points for you to break-even. Over a shorter time horizon, the break-even point is reduced.

Do I need to change my written investment strategy?

Technically no, as most SMSF Investment Strategies authorise investment in managed funds. That said, it may not have been the intention or within the understanding of all the Trustees that your SMSF may be investing in a short fund – so it’s probably a good idea to update your strategy.

Other Alternatives

There are other ways to take a bearish view on the market, or hedge a position. Firstly, you can trade the SPI Futures Contract directly – although finding a broker who will deal with ‘retail’ clients is difficult. And then there are the ‘dreaded’ CFDs.

Probably the easiest is through the ASX Options Market, where you can take a position on an individual stock, or the overall market through Index Options. Most stockbrokers are happy to deal with retail clients in equity and index options – so it is not too hard to get stated. See Three popular strategies for trading stock options for a discussion on some of the strategies – and if you do head down this path, don’t forget to review and update your investment strategy.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.