The BetaShares Australian Equities Bear Hedge Fund ETF (ASX: BEAR) might be used to partly protect share portfolios or profit in a declining market, but is it worth it?
What The BEAR ETF Does
The Bear ETF seeks to generate returns that are negatively correlated to the Australian share market, in particular, the S&P/ASX 200 Accumulation Index, which is the S&P/ASX 200 Index (INDEXASX: XJO) with dividends reinvested.
In other words, when the market goes down, the fund should go up. The current portfolio exposure is -101.7%, meaning if the market falls 1% the fund should appreciate roughly 1.01%.
This is achieved by selling equity index futures contracts. While this fund may help your portfolio performance in a downturn, there are a few key risks to be aware of.
BEAR Fees And Risks
The Bear ETF is actively managed, so fees are higher than a typical index ETF. Current management costs are 1.38% which is a significant fee compared to most other ETFs.
In a bull market, this ETF will weigh on your portfolio’s performance because of the negative correlation and the fees. In a downturn, it could boost your returns, but the fees will eat away at some of that return.
My main concern with this ETF is that it uses futures and derivatives which are complex instruments not typically recommended to retail investors. While the ETF structure provides protection from some of the downsides such as margin calls, I would be cautious with this ETF unless you fully understand how it works and what the risks are.
Would I Use It?
As far as strategies go, I wouldn’t use this ETF to seek positive returns in a falling market. I would rather invest in high-quality companies with sustainable competitive advantages.
While the BEAR ETF may provide value as a hedging strategy, I think the average investor would be better off holding a diversified portfolio of great businesses, as well as some bonds and cash.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
