Welcome to Finance and Fury, the Say What Wednesday Edition. This weeks question comes from Gab.

“I had a question regarding a leveraged ETF from Betashares called GEAR. It is designed to offer around 2:1 exposure to the ASX 200, with 0.8% management cost. Looking at the long term growth and dividends, it seems like an excellent way to get exposure to the market and bank in around 20% franked divided (at 107% ??). Also no margin calls …. Am I missing something? It seems too good!”

Not personal advice – Just general information

GEAR

  1. The Fund is ‘internally geared’, meaning all gearing obligations are met internally by the Fund.
    1. How this works – combines funds received from investors with borrowed funds and invests the proceeds
    2. The Fund’s gearing ratio (being the total amount borrowed expressed as a percentage of the total assets of the Fund) is managed between 50-65%
    3. This is the LVR – rebalance the LVR to the middle of the range (i.e. 57.5%) whenever it reaches either the minimum 50% or maximum 65% threshold
      1. Current gearing ratio – 60.1% – As at 27 April 2020. Calculated as Fund borrowings divided by Fund total assets. Current Gearing Ratio is as at start of the above date and can be expected to vary throughout the day.
      2. Current gearing multiple – 2.5 – Represents the Fund’s approximate exposure, for the above date, to movements in the Australian share market (as measured by the S&P/ASX 200 index). For example, if the Fund’s gearing multiple is 2.1x, and the S&P/ASX 200 index goes up 1% that day, the Fund would be expected to go up approximately 2.1% that day.
    4. A LVR ratio of 65% means that for every $1 invested, an additional $1.86 is borrowed to invest (providing a gross exposure of $2.86 for every $1 invested)
  2. What they invest in – passive investment strategy – ASX 200 Index
    1. broadly diversified share portfolio consisting of the largest 200 equity securities on the ASX by market capitalisation (as measured by the S&P/)
    2. designed to provide leveraged exposure to a passively managed portfolio of broadbased Australian equities. The Fund will gain its Australian equities exposure by investing in the constituents of the S&P/ASX 200 Index, weighted by market capitalisation
  3. How it operates – they use just one lender to gear – Deutsche Bank AG as the Lender to the Fund. At the time of review, the Manager has disclosed the Fund’s borrowing cost as 1.85% p.a. – but their underlying costs are lower – MER at about 0.8%
    1. At the moment – a lot of gearing funds are cheaper – massively low cost to borrow due to lower interest rate environment –
    2. That is one thing to watch out for – if funding costs go up, the MER goes up quite a bit – these types of geared funds were sitting at between 3-6% not that long ago – so that would reduce future gains
  4. Price movements – was at $94 – price currently at $13.76
    1. Did hit $10 at the bottom.
    2. But unlike margin loans – GEAR gives you the opportunity to make magnified gains when the Australian sharemarket rises, and vice versa.
  5. Income yields – do look good at the surface level –
    1. Good dividend levels and also franking levels – but this is due to the gearing of the funds
    2. 12 month distribution yield – 16.7% – but grossed up including fanking credits = 24.4%
      1. Figures based at 31 March 2020. Yield figures are calculated by summing the prior 12 month net and gross fund per unit distributions divided by the fund closing NAV per unit. Franking level is total franking level over the last 12 months – have the disclaimer of Past performance is not an indicator of future performance.
    3. They say their level of franking is 107.6% –
      1. Looks a little Skew due to the Gearing –
    4. Break it down – they are a passive index fund – in the ASX200 – what is the ASX200 dividend yield –
    5. What is the franking?
    6. Now apply the gearing ratios – 2.5 times the funds invested – It does amplify the incomes –
      1. ASX200 – about 5% p.a. = close to about 13%
      2. Franking – ASX has about 62.42% franking as well – so grossing this up allows for additional flow throughs for distributions
    7. comparisons in distributions –
      1. First of 2020 – $1.02 – 12.25% yield based around the lower price
      2. 2019 – $1.76 distribution – 13.43% yield
      3. 2018 – $1.65 distribution – 15.83% yield
      4. 2017 – $1.37 distribution – 15.27% yield
      5. 2016 – $0.94 distribution – 9.19% yield
    8. It is calculated as the difference between total Fund return and NAV return. NAV return is the change in the Fund’s NAV price. Total return is the NAV return plus reinvestment of all distributions back to the Fund. Past performance not indicative of future performance.
    9. Good incomes – but the total returns need to also be looked at –
      1. 3m – negative 54.39% – 1y is about negative 45% – but the average annual return is -9.01%
      2. These include the distributions though – quoted returns = Returns are assuming income is reinvested – and does not take into account tax
    10. Returns have two components – incomes and growth = total return –
      1. Capital growth versus income –
      2. Distribution on income – taxable – but do get the franking credits to offset this – so in a lot of cases – taxable incomes of about $40k and above would result in net 4.5% tax payable
    11. Exchanging growth for income which gets taxed
      1. Reduces the yields a bit when breaking it down –
    12. Is it a good time to buy? It is all relative – good to time buy compared to 3 months ago? Yes
      1. 3 months from now- maybe not –
    13. Would caution against it for now – likely the ASX isnt through the woods –
      1. In addition – the growth returns on geared funds at this stage do have some longer term upside
      2. But overall – When it comes to geared funds – they are ones that do almost need to be timed to work well –
      3. Typically invest when the market is low – avoid buying when funds are slightly higher
      4. The returns are amplified but the issue is that the losses are amplified
      5. You lose 50% – you have to make 100% return back to original value
    14. Whilst geared – one or two bigger declines in a decade – which can happen – wipe out potential growth returns –
    15. As can be seen now – has a negative return since inception – and this includes the distributions being reinvested
    16. Also – if the funding rate costs do go up – could result in lower payments of distributions

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

Furious Fridays: What happens if the EU collapses?

Furious Friday What happens if the EU collapses? Welcome to Finance & Fury, the Furious Friday edition. For the past few weeks we’ve been talking about the EU and this week we’ll finish up by looking at the flow on effects of the EU breaking up. There’s no way to...

The Curious case of Pandemic Bonds

Welcome to Finance and Fury, The Furious Friday edition You probably are exhausted about the coronavirus - What you probably haven’t heard about is A little known type of bond created in 2017 by the World Bank. The World Bank – Headquartered in Washington DC – back in...

How can you tell that property prices will be high in a city?

Welcome to Finance and Fury,  Back from Holidays – spent some time in the USA - Got me thinking about differences in property and their pricing – seeing property prices vary differently state to state – city to city – want to do a Series on property and its prices –...

When to refinance and negotiate value

Welcome to Finance and Fury. Today we have Jayden with us, and we will be talking about negotiating with banks and refinancing. Refinancing: Pros and Cons and how to negotiate Bank Valuations Interest rates might go up or might go down.so this is all about asking, is...

What has created a system where the share market can go down so quickly?

Welcome to Finance and Fury, The Furious Friday edition What has created a system where the share market can go down so quickly? The perfect storm – Panic, OPEC agreement breaking down – computer algorithms kicking in, mass sell-offs of index funds The recent collapse...

Why the Australian Share index is so reliant on just 5 companies and the risks that this brings

Welcome to Finance and Fury Today we are discussing the concentration risk Last week – how the modern banking system acts like dominos failing– Due to their liabilities and obligations to one another this week – look at the other side of the balance sheet – Which is...

The circular economy – The greatest barrier to competition and choice, or the saving grace for our futures?

Welcome to Finance and Fury, the Furious Friday edition Last week - went over partnership programs and potentials for coercive monopolies – today – implementation of policies in the circular economy – SDG12 Today’s ep – go through google and the largest companies on...

Say What Wednesday: How to negotiate with real estate agents

Welcome to Say What Wednesday! Today’s question is from Mark; “Hi guys, lovin’ the show – I’m looking to buy my first place in Brisbane and I was just wondering if you have any tips on how to negotiate with the real estate agents and work out what price I should be...

Why do we look to be in a Property Bubble?

Welcome to Finance and Fury, the Furious Friday edition. Today we have a pretty good episode! (I find this interesting at least, so I hope you do too) – We’re talking about the Australia Property market, specifically the property bubble. How monetary policy has...

How do we reduce poverty?

Welcome to Finance and Fury, the Furious Friday edition. This week is a flow on from last week’s episode talking about the basics of supply-side economics. But, it’s going to be applied to a question we got from Nick. What is a solution for society that would...

Pin It on Pinterest

Share This