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The big tilt: using ETPs to capitalise on short-term market moves

Photo of David Bassanese By David Bassanese

min read

Investors backing their trading views on more local and global themes

When it comes to exchange-traded products (ETPs), the common perception among many investors is that they are cost-effective investments that can form part of long-term core portfolio holdings.

Indeed, for those running their own self-managed super fund (SMSF), it is hard to go past the cost, convenience and diversified exposure to key asset classes such as bonds and equities that these products can provide.

It is now possible to create a highly diversified portfolio, made up entirely of ETPs, spanning cash, bonds, international and local equities – and even commodities such as oil and gold – for an overall management investment fee of not much more than 0.5 per cent per annum or even less.

But given the widening range of funds now available on ASX, investors should also appreciate that they can offer much more.

ETPs are also handy trading tools in their own right for more active investors seeking to trade specific global investment themes or even specific events like the UK’s Brexit decision. The more active use of these funds in this regard is clearly evident in the strong growth in monthly trading volumes, which have increased from just over $500 million a month in mid-2012 to $2.3 billion in August 2016.

With ETPs, investors are now able to trade the overall direction of the market, as well as tactically tilt their portfolios toward certain country or regional equity markets, or even global sectors. Investors can also trade currencies and commodities.

Trading options

What options are available to investors? For a start, let’s say you develop a view that the equity market is over-extended and set for a correction. With the BetaShares Australian Equities Bear Hedge Fund (ASX Code: BEAR), for example, you can seek to profit from, or protect against, a market decline as the fund is designed to be negatively correlated to the returns of the Australian equity market.

(Editor’s note: Some newer style ETPs include gearing. Go to the end of this article for an explanation of key risks).

On any given day, for example, BEAR aims to rise by broadly the same percentage magnitude in value that the market declines, and vice-versa, but it should not be expected to provide the exact opposite of the market return over any time period. (This negative correlation is achieved by the fund maintaining a short SPI futures exposure broadly equal to its funds under management.)

BetaShares also offers a Strong Bear variant (ASX Code: BBOZ) which aims to rise by around 2 to 2.75 per cent, on any given day, for every 1 per cent decline in the market, and vice versa. There’s also a US Equities Strong Bear Hedge Fund (ASX: BBUS), offering similar negatively correlated (currency hedged) exposure to the S&P 500 Index.

Going the other way, if you develop a short-term bullish view on the market, the BetaShares Geared Australian and US Equity Hedge Funds (ASX Codes: GEAR and GGUS respectively) seek to provide gains of around 2 to 2.75 per cent on any given day the market rises by 1 per cent – and vice versa.

These geared funds are able to borrow at relatively cheap wholesale rates generally unobtainable by retail investors, and being internally geared they do not subject investors to any margin calls.

Geographic, industry tilts

Another way to tactically trade the equity market is through geographic or industry tilts. Again, there is now a wide range of ETPs providing specific exposure to certain countries or regions, including the United States, Europe, Japan, Asia and emerging markets. Over recent years, for example, the US market has tended to perform relatively strongly, which would have rewarded tactical tilts in this direction.

More recently, emerging markets have been flavour of the month, and investors can use ETPs to buy exposure to this overall group of countries (including, for example, China, Russia, India and Brazil), or select countries such as China alone.

Some investors are also looking at possible outperformance by Japanese and European equities over the next year or so, given the prospect of rising US interest rates and the apparent relative cheapness of these markets on some valuation metrics, such as cyclically adjusted price-earnings ratios (CAPE).

It is now also possible to tilt equity market exposure in favour of certain global sectors. BetaShares, for example, recently launched a suite of funds that each provide exposure to the leading global companies in sectors such as healthcare, agriculture, cybersecurity, energy, gold mining and banking.

Although not a sector fund per se, the Nasdaq-100 ETF (ASX Code: NDQ), also provides relatively high exposure to the leading US-based technology companies, including those termed FAANGs (Facebook, Amazon, Apple, Netflix and Google).

Using ETPs to trade a currency view

Currencies are another option. Again, the beauty of using ASX-traded funds to trade currencies is that it can all be handled on the single ASX platform and there is no embedded leverage involved.

Investors are now able to take views on trends in the US dollar, euro and British pound against the Australian dollar. Indeed, the UK referendum decision to leave the European Union provided a classic example of how tactical opportunities can be traded through exchange-traded investment funds – in this case the British Pound ETF (ASX Code: POU).

In the weeks leading up to the Brexit decision, the pound rallied strongly against the Australian dollar as opinion polls suggested the “remain” vote would prevail. As it turned out, the pound slumped after the decision to leave, but there have been tradeable bounces in the currency ever since.

Last, but not least, there are now also multiple options to trade commodities through ETPs, with funds covering gold, oil and even agricultural prices. Indeed, trading in oil and gold funds is becoming increasingly active, with investors taking views on the latest twists and turns among oil producers and central banks.

All up, ETPs can be – but need not just be – buy and hold investments bedded down in a long-term portfolio. The broadening range of funds now available also allow more active investors to take short-term tactical positions across many different global markets.

Note: The Bear and Strong Bear funds’ strategies of seeking returns that are negatively correlated to market returns are the opposite of most managed funds. Also, gearing is used in GEAR, BBUS and BBOZ, which magnifies gains and losses and may not be a suitable strategy for all investors. Investors in geared strategies should be willing to accept higher levels of investment volatility and potentially large moves (both up and down) in the value of their investment. Geared investments involve significantly higher risk than non-geared investments. Investors should seek professional financial advice before investing, and monitor their investment actively. An investment in any of the funds should only be considered as a component of an overall portfolio. The Geared, Bear and Strong Bear funds are actively managed and do not track a published benchmark.

About the author

David Bassanese @DavidBassanese is Chief Economist at BetaShares, one of Australia’s leading providers of exchange-traded funds. He is a former Treasury and OECD economist, with experience as a senior economist and interest-rate strategist at Macquarie Bank. He is also a former columnist with The Australian Financial Review.

From ASX

If you have ignored ETFs because you do not understand them, or because they did not offer the exposure you were looking for at the time, now might be a good time to review our online course on ETFs. The course is free and no registration is required. The material is divided into topics so you can skip those you are not interested in and focus on those you are. There are lots of graphics and activities to help you reinforce what you have learned.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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