As the economy falters, the pandemic returns to Victoria and markets nudge all-time highs, the growth of the BetaShares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ) suggests not all investors are convinced this bull market can last.
Bull market continues
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.
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BBOZ or BEAR?
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 BBOZ worth the risk?
There are two main reasons investors consider BBOZ ETF:
- To hedge or provide some protection for a share portfolio
- To speculate on a market downturn.
Speculating and trying to call the ‘top of the market’ is risky and when the ETF is leveraged, as BBOZ is, it could lead to large losses if your timing is wrong.
Hedging a long portfolio with a negatively correlated ETF has its merits. However, 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.
This story first appeared on Best ETFs Australia.
