Unleash the power of gearing
Learn how gearing works in Australian equities and get to know our latest offering, ASX: GMVW.
What is a geared strategy?
Gearing is an investment strategy whereby investors’ capital is combined with borrowed funds, making the amount available for investing larger with the aim of magnifying returns. It is not uncommon to borrow for large purchases. Australian investors are also knowledgeable about borrowing to invest, as gearing is a popular strategy for those investors who own investment properties, and in this instance, associated tax benefits.Some investors also borrow to buy shares. This can result in ‘positive gearing’ because the income from shares in the form of dividends may exceed the income payments for the loan. While this isn’t always the case, borrowing to invest in Australian shares has been popular because Australian equities tend to pay higher income than companies listed on overseas exchanges. This can be attributed to the favourable tax treatment of dividends.
While not without risk, gearing is popular for investors seeking growth. Some investors do this themselves via margin loans, others use synthetic products such as CFDs (contracts for differences) and listed warrants. These approaches can be costly and require onerous paperwork. Investors now have a simple and convenient way to access a geared Australian equity portfolio, via GMVW which listed on ASX on February 29, 2024.
The impact of gearing
The modelled table below illustrates how gearing can affect investment gains and losses in comparison to a fund that is not geared.
Table 1: Modelled performance of a geared and ungeared fund.
|
Geared |
Ungeared |
|
|
Initial investment |
$4,000 |
$4,000 |
|
Fund gearing level |
60% |
Nil |
|
Amount borrowed by Fund |
$6,000 |
Nil |
|
Amount invested in market |
$10,000 |
$4,000 |
|
If the value of the Fund's assets rises by 10% |
||
|
Rise in value of the Fund's assets |
$1,000 |
$400 |
|
Value of Fund assets |
$11,000 |
$4,400 |
|
Outstanding loan |
$6,000 |
Nil |
|
Value of investment |
$5,000 |
$4,400 |
|
Gain on investment |
$1,000 |
$400 |
|
Return |
+25% |
+10% |
|
If the value of the Fund's assets falls by 10% |
||
|
Fall in value of Fund's assets |
-$1,000 |
-$400 |
|
Value of Fund assets |
$9,000 |
$3,600 |
|
Outstanding loan |
$6,000 |
Nil |
|
Value of investment |
$3,000 |
$3,600 |
|
Loss on investment |
-$1,000 |
-$400 |
|
Return |
-25% |
-10% |
Gearing Australian equities
We have recently listed on ASX the VanEck Geared Australian Equal Weight Fund (Hedge Fund) (ASX: GMVW).
GMVW is an Australian equity strategy that combines investors' funds and borrowed funds to invest in the VanEck Australian Equal Weight ETF (MVW). The fund does the borrowing, so you don’t have to. This means that investors in GMVW avoid the costs and complications of margin loans and CFDs and this can be burdensome, more so for SMSF investors.
Interest rates are high and access to borrowing is difficult, VanEck has been able to arrange gearing within GMVW. The fund itself enters a borrowing arrangement, meaning investors are not exposed to the risk of margin calls.
GMVW uses VanEck’s capacity as an institutional investor and can borrow at significantly lower interest rates than those typically available to individual investors.
Comparing GMVW vs other ways to gear Australian equities
GMVW invests in MVW, one of the best-performing Australian Equity Funds since it launched almost 10 years ago.
MVW is different from other Australian equity ETFs because at each rebalance it equally weights its constituents, rather than including companies based on its market capitalisation. Equally weighted portfolios have historically outperformed their market capitalisation counterparts over the long term.
This is also important in terms of diversification, simply gearing the S&P/ASX 200 for example, amplifies your already significant exposure to BHP and the big ‘4’ banks.
Table 2: Comparing GMVW with other ways to gear Australian equities
|
VanEck Geared Australian Equal Weight Fund (Hedge Fund) |
Margin loans |
CFDs/Listed warrants |
|
|
Gearing levels |
45% to 60% |
Set by the investor |
Usually 50% to 90% - set by issuer |
|
Access |
Available on ASX like a share |
Requires credit checks and documentations |
Requires documentations |
|
Downside risk |
Limited to investor capital |
Unlimited recourse to client |
Limited to investor capital |
|
Diversification |
High – MVW is a highly diversified portfolio |
Depends on underlying exposure |
Depends on underlying exposure |
|
Margin calls |
No |
Yes |
No |
|
Borrowing cost |
Accessible at institutional funding rates |
Retail funding rates |
Retail funding rates |
|
Potential for interest deductions |
Yes – interest costs reduce taxable dividends to investors |
Yes |
Yes |
|
Ability to pre-pay interest |
No |
Yes |
Yes |
|
Issuer credit risk |
No |
No |
Counterparty risk of issuer |
|
Super fund/SMSF eligible |
Yes |
No |
Yes |
|
Dividends and franking credits |
Yes |
Yes |
No |
Our latest Vector Insights, The potential and perils of increasing franking credits considers how a geared fund differs from an income perspective. For detailed information about GMVW, visit it's dedicated page.
Key risks:
Gearing means that GMVW borrows money to increase the amount it can invest. While this can result in larger gains in a rising market, it can also magnify losses in a falling market. The greater the level of gearing in GMVW, the greater the potential loss of capital. GMVW is considered to have a higher investment risk than a comparable fund that is ungeared. Investors should actively monitor their investment as frequently as daily to ensure it continues to meet their investment objectives. The key risks are outlined in the PDS.
Published: 19 February 2024
Important information:
This information is prepared in good faith by VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity and issuer of units in VanEck ETFs traded on the ASX. Units in GMVW are not currently available. GMVW has been registered by ASIC and is subject to ASX and final regulatory approval. The PDS has been lodged with ASIC and will be available at vaneck.com.au. The Target Market Determination will be available at vaneck.com.au.
You should consider whether or not any VanEck fund is appropriate for you. Investing in ETF’s has risks, including possible loss of capital invested. See the relevant PDS for details. No member of the VanEck group guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from any fund.
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