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 StreetTRACKS 200 (ASX code: STW) is an ETF that tracks the performance of the S&P/ASX 200 Index.

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).

Example

If you purchased an ETF (ASX code: STW) in September at $36.38, at the current price the percentage return would reflects 11.05% return over 3 months.  As an alternative, by purchasing an STW instalment (ASX code: STWIOC) your return on investment is enhanced to 20.60% over the same duration.  This is illustrated in the following table:

ETF StreetTRACKS 200 (STW) Instalment over STW
Purchase price
(01.09.04)		 $36.38 $17.67
Current price
(30.11.04)		 $40.40 $21.31
Return on investment (%) 11.0% 20.6%

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.

Disclaimer
The information contained is for educational purposes only and does not constitute financial product advice. ASX does not represent or warrant that the information is complete or accurate. You should consider obtaining independent advice before making any financial decisions. To the extent permitted by law, no responsibility for any loss arising in any way (including by way of negligence) from anyone acting or refraining from acting as a result of this material is accepted by ASX.  Past performance is no indication of future performance