Many investors have been perplexed by the ASX share market rally over the last few months in the face of a global pandemic and a looming recession. The growth of the BetaShares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ) suggests some are not convinced this rally can last.
The unstoppable market rally
Despite the persistence of a global pandemic and worrying economic conditions, the S&P/ASX 200 Accumulation Index (which includes dividends) has risen 16.48% over the last three months. While still down over a six and twelve-month timeframe, it seems the market has decided to go its own way and forget about the economy.
Many investors are questioning whether this rally is sustainable and are hesitant to get back into the market. It is important to remember that many economic indicators are delayed by three months or more so we may be yet to see the full impact of coronavirus on our economy. The recent lockdown in Victoria also reminds us of the risk of a second wave.
This wariness of investors is perhaps best reflected in the growth of the BetaShares Australian Equities Strong Bear Hedge Fund or BBOZ.
The strong bear ETF
The BBOZ ETF is the beefed-up version of the BetaShares Australian Equities Bear Hedge Fund (ASX: BEAR) which aims to provide negative correlation to the S&P/ASX 200 Accumulation Index at a ratio of roughly 1:1 (i.e. if the ASX 200 index falls 1% in a day then the BEAR ETF is expected to rise between 0.9% and 1.1%).
The BBOZ ETF takes this same idea and leverages it so that a 1% fall in the index is expected to deliver a 2% to 2.75% increase in the ETF, and vice versa. This suggests that if the market falls the BBOZ ETF could produce very high returns.
However, this also works in the opposite direction. The 2.61% rise in the index through June lead to a 9.8% fall in the BBOZ ETF and over the last 12 months the fund has fallen 17.19%.
This has not stopped investors’ enthusiasm for the ETF with a fund inflow of around $75 million in June, bringing the total market cap to more than $460 million.
Is it worth the risk?
There are two main reasons to invest in the BBOZ ETF. The first would be to hedge a long share portfolio and the second would be to speculate on a market downturn. Speculating and trying to call the top of the market is risky and when the ETF is leveraged it could lead to large losses if your timing is wrong.
Hedging a long portfolio with a negatively correlated ETF has its merits, but the big decision to make then is whether the leverage is required or whether the BEAR ETF may be more suitable which comes down to your own risk appetite.