Betashares US Equities Strong Bear Currency Hedged Complex ETF (ASX: BBUS) allows Aussie investors to bet against the US sharemarket in a big way.
But why would you want to?
The S&P 500 Index (SP: .INX) is up 16.5% in the year to date and 82% over the past three years. Investors holding ASX ETFs tracking US indices are cheering. Loudly.
But according to Tony Locantro of Alto Capital, this is exactly why it might be time for Aussie investors to bet the other way on US shares.
Locantro says the US sharemarket is trading at a "historically overvalued level" and a market correction is a live possibility.
This is why Locantro has a buy rating on the BBUS ASX exchange-traded fund (ETF).
Locantro explains on The Bull this week:
The objective of the fund is to generate a positive return when the S&P 500 total return index falls on any given day.
… with the S&P 500 recently trading near all-time highs, the fund provides investors with downside protection should the market correct from historically overvalued levels.
Locantro also reckons the ASX ETF is trading below its fundamental worth, commenting: "We believe the price of the fund is undervalued."
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BBUS is a different kind of ASX ETF
BBUS is very different to your regular ASX ETF.
Not only do investors make gains if the US market falls, the ETF is also geared to magnify the outcome.
Locantro explains:
If the US sharemarket falls by 1 per cent, the fund is expected to deliver an increase of between 2 per cent and 2.75 per cent in value.
The opposite applies if the sharemarket rises.
Betashares calls it an 'inverse' ETF.
BBUS invests in cash and cash equivalents, and sells S&P 500 futures contracts to obtain a magnified (or geared) exposure.
Betashares argues that the ETF protects investors holding direct US shares or other ETFs tracking the US market from a decline.
It does so by reducing the need to sell those other holdings (thereby crystallising recent capital gains) when the market turns south.
Is it a good pick for amateur investors?
BBUS ETF closed at $2.83 apiece yesterday, up 0.71%.
Given the strength of the US market over the past three years, it may seem counterintuitive to consider betting against it.
But when the chair of America's biggest bank, JPMorgan, openly speaks of heightened risks of a correction, it's worth paying attention.
Jamie Dimon says he is "far more worried" than others about the potential for a market correction over the next six months to two years.
In an interview with the BBC last month, Dimon said there were a "lot of things out there" creating uncertainty.
He cited geopolitical tensions, fiscal spending, and the remilitarisation of nations.
Dimon said:
All these things cause a lot of issues that we don't know how to sort out.
So I say the level of uncertainty should be higher in most people's minds than what I would call normal.
Just remember, if you're thinking of following Locantro's advice and buying the BBUS ETF, you better have confidence (not to mention courage) in your convictions because if you're wrong, your losses will be magnified due to the gearing.
Track record of BBUS ETF
The calendar year performance of the BBUS ETF paints a picture of the risks of a geared investment strategy.
Over the past seven calendar years, BBUS has delivered positive returns in just two of those years.
In 2022, the ASX ETF delivered a spectacular 44.65% return after the S&P 500 returned 18.51%.
In 2018, BBUS returned 6% after the S&P 500 delivered 4.94%.
Compare this to last year, when the BBUS ETF returned 34.85% after the US market ripped 24.5%.
Betashares says:
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.
The ETF provider adds:
Gearing magnifies gains and losses and may not be a suitable strategy for all investors.
