This ETF put investor returns into top gear during the recovery

If you thought the returns from the ASX 200 were good since the COVID-19 crash, here’s an ETF that shifted the ASX gear to the next level.

| More on:

Image source: Getty Images

As investors, we’re always on the hunt for the best returns. Well, one Aussie exchange-traded-fund (ETF) has managed to gear up ASX returns by more than 100% since the COVID-19 crash. This is pretty mind-boggling, considering its holdings mirror the ASX 200. So, what’s the secret?

Leverage magnifies ASX returns… and risk

The last 15 or so months have been golden for investors going long on the ASX share market.

If you had invested in the S&P/ASX 200 Index (ASX: XJO) at the very bottom of the COVID-19 crash on 23 March 2020, you’d have returned 61.6%, which is not to be sneezed at.

However, BetaShares Geared Australian Equity (Hedge Fund) (ASX: GEAR) took the recovery returns to a whole new level. In the same time frame, the leveraged ETF has increased 182% in value, significantly outstripping the benchmark index.

But how? The difference is a thing called leverage. It’s the same as when buying property – most people take out a loan so they can purchase a higher dollar-value property. Leverage in the stock market is essentially the same – but instead of a house, it’s ASX shares.

It’s important to note, applying leverage magnifies both returns and losses. If the benchmark index falls, a leveraged investment will fall more. And whether you’re making money or losing it, you’ll still have to pay interest on the loan amount.

According to BetaShares, one advantage of its GEAR ETF is the lower cost of borrowing. The fund makes this possible by using its size to borrow at cheaper rates than those available to individuals. This cost is wrapped into the 0.8% per annum management fee charged.

Not everyone is a fan

Despite delivering market-beating returns since the crash, not everyone is cheering for leveraged ETFs. In fact, Stockspot founder Chris Brycki thinks they shouldn’t be classed as ETFs at all:

I don’t think they should be classed as ETFs, they are basically dangerous structured products. Even if you get the direction right, these are terrible products to use because the compounding of daily returns makes them not appropriate as investments.

Even BetaShares managing director Alex Vynokur advises leveraged ETFs should not be used as a standalone investment. Instead, he says the product could be considered more of an insurance policy within a diversified portfolio.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ETFs

A man activates an arrow shooting up into a cloud sign on his phone, indicating share price movement in ASX tech shares
Share Market News

Is the Betashares Nasdaq 100 ETF (ASX:NDQ) an opportunity in this market correction?

Could the Betashares Nasdaq 100 ETF (ASX: NDQ) be a good opportunity during this correction for both the global share …

Read more »

the words ETF in red with rising block chart and arrow

Is VAS (ASX:VAS) really the best ASX ETF on the share market?

Could the Vanguard Australian Shares Index ETF (ASX: VAS) be the best exchange-traded fund (ETF) on the ASX? That’s a hard question …

Read more »

ETF spelt out

2 excellent ETFs for ASX investors in February

If you’re wanting to add some diversification to your portfolio, then you might want to look at exchange traded funds …

Read more »

Global technology shares

2 top international ETFs for ASX investors

If you’re looking for an easy way to invest in international shares for diversification, then exchange traded funds (ETFs) could be …

Read more »

Block letters 'ETF' on yellow/orange background with pink piggy bank

2 strong ETFs for potential growth

Key points ETFs can give investors useful ways of investing in strong portfolios VanEck Morningstar Wide Moat ETF looks for …

Read more »

Block letters 'ETF' on yellow/orange background with pink piggy bank

2 popular ETFs for ASX investors in 2022

One increasingly popular way to invest is using exchange traded funds (ETFs). And it isn’t hard to see why. ETFs …

Read more »

a business person in a suit traces the outline of an upward arrow in a stylised foreground image with the letters ETF and Exchange Traded Funds underneath.

Why Vanguard MSCI Index International Shares and this ETF could give your portfolio a boost

If you’d like to invest in a large number of shares but aren’t sure which ones to buy, you could …

Read more »

the words exchange traded fund with a zig zag arrow pointing up

2 ASX ETFs with strong growth potential

Key points ETFs can be an effective way to invest for the long-term One ETF with underlying growth is one …

Read more »