Using instalments to leverage into the S&P/ASX 200 Index

Are you looking to build an investment portfolio with exposure to the S&P/ASX200?   Find it difficult to gain direct, leveraged exposure to the index?

You can achieve both by combining instalments and Exchange Traded Funds (ETFs).

Getting exposure to the broader market

ETFs provide an efficient, cost effective, packaged investment vehicle.  They can deliver similar returns as the index without being reliant on the fund manager’s performance.  Indexed ETFs can give you the ability to gain exposure to an index in one simple transaction on ASX.  For example, the SPDR S&P/ASX 200 FUND (ASX code: STW) is an ETF that tracks the performance of the S&P/ASX 200 Index. More information on ETFs.

Instalments are issued over several ETFs allowing you to gain a leveraged exposure to an index. This can magnify your returns for the equivalent capital invested; a 1% rise in the index may result in a 2 or 3% rise in the value of the ETF instalments (depending on the instalments level of gearing).

By purchasing instalments over an ETF you are also eligible to all distributions and franking credits that are associated with the ETF. STW pays two distributions a year, we can enhance our dividend yield by purchasing instalments as opposed to units in the ETF.

Example

On the 2nd of January 2009, we purchased a 1000 units of STW ETFs and STW instalments, the instalment will have an exercise price of $22.00. We will compare their returns over the 6 months up to June 2009. The initial purchase price per unit are listed below:

  ASX SPDR 200 ETF (STW) Instalments over STW
Purchase price 02.01.09 $34.49 $15.20
Sale price 01.06.09  -  -
Return on Investment %  -  -

Main benefits of the strategy

  • ETFs provide a cost effective instrument to gain exposure to the broader market.
  • Instalments allow you to obtain a leveraged exposure to the index.
  • Both ETFs and instalments are eligible within Self Managed Super Funds.
  • Risk is limited to the capital invested.

Main risks of the strategy

  • If the index level falls, the instalment will decrease in value.
  • A small negative movement in the ETF will lead to a greater percentage decrease in the instalment price.