The coronavirus fear caused yet another horrific day for trading as the ASX plummeted by 4.2%. It is safe to say that the 11-year bull run following the GFC is now over. In turn, investors must take precautions as we experience an unpleasant bearish decline.
Source: Google news search ASX 200
Now, most investors can make money during a bull run. However, the real test is whether you can make money when the markets are crashing, companies are hitting record lows and volatility is extremely high.
Some strategies to make money off a bearish decline or a market crash include:
- Investing gold = Safe haven
- Shorting the market or stocks through derivatives = options, swaps (The Big Short) or futures.
- Investing in fundamentally strong stocks at a discount, holding, and then cashing in a few years later = Value Investing (Warren Buffett)
- Inverse Exchange Traded Funds (ETF’s)
I only came across inverse ETF’s a couple of days ago. However, I am so glad I found out about inverse ETF’s. Because some of these investment vehicles are posting 100+% monthly returns while the ASX is being hammered.
Today we are discussing how inverse ETF’s work, three hot ETF’s on the ASX, and whether the investment vehicle is worth the investment?
How do Inverse ETF’s work ?
In a nutshell, an inverse ETF performs equal to an index but in the opposite direction. For example, the ASX dropped by 4.2% today meaning an inverse ETF mirroring the ASX200 would record a 4.2% gain.
However, inverse ETF’s mathematically calculate their returns based on day-to-day performance. In turn, the ETF is reset the following day. Thus, ETF’s are often a day traders dream. Why?
Because if an investor knows that the market is likely to crash on a certain day then investing in the inverse ETF could provide a mouth-watering profit for that one day. Thus, Inverse ETF’s are a short-term, not long-term, investment vehicle.
Inverse ETF’s thrive when an index is being battered day after day, week after week. Making it no surprise that while the coronavirus is beating up the ASX200 inverse ETFs are soaring.
Three potential inverse ETF’s during the coronavirus
Australian Equities Bear Hedge Fund (ASX: BEAR)
BEAR surged by an impressive 43% in the past month. The current decline in the ASX is the driving force behind BEAR’s share growth. Because a higher return is causing more investors to rally behind the fund.
Source: Google search BEAR ASX
BetaShares sell futures (a financial derivative) to generate a return on the BEAR fund. The returns created are negatively correlated and equally opposite to the performance of the ASX200. Meaning if the ASX200 plummets by 4% investors should expect a return of 3.9-4.1%.
Australian Equities Strong Bear Hedge Fund (ASX: BBOZ)
If you thought that BEAR’s monthly return was mouth-watering just listen to this, BBOZ reported a monthly gain of 111%. Yes, that is right 111%. You might be wondering how a return north of 100% is possible when the ASX only fell 30% in the past month.
Source: Google search BBOZ ASX
The answer is that BBOZ is a leveraged inverse ETF. What is a leveraged inverse ETF? Essentially, it’s where a fund utilizes options (another derivative) to leverage its capital and thus magnify its returns. In turn, if the ASX200 falls by 1% then investors should expect a 2.0-2.75% return under the BBOZ fund.
US Equities Strong Bear Hedge Fund (ASX: BBUS)
Unlike, BEAR and BBOZ, BBUS allows investors to profit off a market downturn in the S&P 500. Thus, if you were confident in predicting the market activity for the S&P 500 then BBUS is the inverse ETF for you.
Just like BBOZ, BBUS is also a leveraged inverse ETF. Allowing the fund to magnify its returns when the S&P 500 plummets.
BBUS, through the use of options, reported a whopping 128% return over the past four weeks. Making BBUS the best performing inverse ETF out of the three.
Source: Google search BBUS
Are they worth the investment ?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Some investors after reading returns like 43%,111% and 128% in a month are instantly ready to buy. However, before you jump the gun it worth be worth weighing up the positives and negatives of investing in these inverse ETF’s.
Without a doubt, the coronavirus is causing a severe downturn in both the ASX and S&P 500. Thus, making the above inverse ETF’s extremely profitable.
Moreover, investing in an inverse ETF is simple and relatively cheap. Allowing investors to easily invest in an ETF. Instead of trying to short a stock.
If the markets experienced a miraculous turn around you could see your hard-earned cash disappear in the blink of an eye.
Furthermore, inverse ETF’s is a short-term strategy. Meaning timing is imperative. Just look at the difference between BBUS and the S&P 500 over the past year.
#1 Source: Google search BBUS ASX
#2 Source: Google search SP 500
Personally, I am not for or against inverse ETF’s. Simply acknowledging the risks. Because YIG believes investors must have a balanced perspective before investing.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.