As the ASX 200 continues its miraculous recovery, this popular bear market strategy is quickly unravelling

Here's why investors in 'short' ASX ETFs wouldn't be too happy right now.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The ASX looks set to back up last week's miraculous recovery with another week of gains this week before Easter.

At the time of writing, the S&P/ASX 200 Index (ASX: XJO) has notched up another 2.55% gain to 5,339 points. That means since the start of the week, the ASX 200 has added 5.4%. And that comes on top of the 4.6% the ASX banked last week.

While most ASX investors would be rejoicing at this turn around of fortunes, there would be some investors gnashing their teeth right now.

I'm referring here to short-sellers – investors who bet against the market and profit when it falls. It's a strategy that's seen a lot of increased attention in recent weeks, for obvious reasons.

True short selling involves borrowing another investor's shares, selling them, and then buying back at a later date and returning the shares. It's a strategy that's traditionally only really available to institutional and 'sophisticated' investors – and far outside the reach of your average retail investor on the street.

But the rising popularity of exchange-traded funds has changed this paradigm.

One such ETF is the BetaShares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ).

This fund (readily available on the ASX) is a 'short ETF' – meaning it is structured in a way that allows its value to rise when the value of the ASX 200 falls. It's a 'short' for the average investor.

Now on the surface, this might appeal to many investors out there. But it might just be a whole lot more dangerous than it initially appears.

Firstly, this fund is not your typical ETF. It doesn't hold underlying stocks, rather a bunch of derivative contracts, which enable the fund to profit if the broader index falls in value. In this way, you have no real assets underneath as you might in a 'normal' ETF.

Secondly, it's not suitable for a long-term investment (in my view anyway). BetaShares makes it clear this ETF is 'reset' at the end of each trading day, which involves some value destruction. To illustrate, the fund has returned -9.79% per annum since its inception in April 2015. That compares with the ASX 200 returning 1.42% per annum over the same period. As you can see, the values don't correspond too well. Another thing to consider is its management fee of 1.38% per annum.

Foolish takeaway

I admit that some investors might find this ETF a useful one, but for me, the risks outweigh the potential rewards. For instance, over the last 2 weeks, the fund has lost significant value, all while the broader ASX 200 has recovered. This is not much more than a device that enables you to take a punt on what direction the markets might go next. So have a punt if you'd like, but don't expect better odds than flipping a coin!

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Risk Managment

ASX shares Business man marking buy on board and underlining it
⏸️ Risk Managment

World's largest fund manager says ASX volatility a great buying opportunity

Here's what the world's largest fund manager is saying about the share market right now.

Read more »

inflation written on wooden cubes being balanced with a piggy bank and small shopping basket
⏸️ Risk Managment

How these 2 fund managers have positioned their portfolios for inflation

These fund managers would rather be safe than sorry when it comes to inflation...

Read more »

inflation written on wooden cubes being balanced with a piggy bank and small shopping basket
⏸️ Risk Managment

Inflation? The tough choice facing all ASX investors right now…

Will inflation come sooner than we think? The answer can affect your ASX share portfolio

Read more »

A piggy bank attached a bicycle pump floats up, indicating rising inflation
Economy

3 things that might happen to ASX shares if inflation returns

Here are 3 things to watch out for if inflation returns...

Read more »

ASX 200 shares RBA taper quantitative easing represented by letters QE sitting on piles of cash
⏸️ Risk Managment

RBA might end QE in 2021! Will the ASX bubble burst?

Reports are suggesting that the Reserve Bank of Australia (RBA)'s quantitative easing (QE) program could be coming to an end.

Read more »

Hand holding a pin next to a bubble with a dollar sign in it
⏸️ Risk Managment

Will the ASX see a share market bubble in 2021?

After a better-than-expected 2020, will the ASX share market see a bubble in 2021? This commentator thinks so, here's why

Read more »

AGL capital raise demerger asx growth shares represented by question mark made out of cash notes
⏸️ Risk Managment

Is the share market starting to look like it did in 1999?

The Nasdaq Composite Index has just had a few years of massive gains. It's starting to look a little similar…

Read more »

How to invest

Market crash 2.0: how I'd prepare for the next market sell-off

The next market crash could create buying opportunities for long-term investors in my opinion. Preparing now could be a shrewd…

Read more »