ETFs can lose money too

Investors should be wary of venturing too far from “plain vanilla” ETFs, as some funds will leave you worse off.

The information boards at the Australian Securities Exchange in Sydney. (AAP Image/Craig Golding)

If you are among the wave of Australian investors joining the rush to invest in Exchange Traded Products it’s worth knowing they don’t all make money — especially as ETFs move further away from the early “plain vanilla” models.

Betashares, the locally owned ETF house, has pushed quickly into the more sophisticated end of the market with the launch of its cleverly named BEAR fund for, well ... bears, back in July 2012. It followed two years later with the GEAR fund for local investors who were so optimistic about the sharemarket they were happy to buy an ETF with a gearing level between 50 and 65 per cent. (Betashares was not alone in having fun with ASX codes, AMP Capital did a property securities fund with the code RENT).

Five years later and the bulls have been winning comprehensively with the GEAR fund well up and beating the ASX, the BEAR fund on the other hand has been a loser over most of the time since 2012. The fund was priced at $22.76 in 2012, but has slid to a miserable $14.82 this week.

Which just goes to show that “smart beta” funds and other variations on ETFs move quite a distance from the core idea of index investing ... and if you happen to back an “active” ETF which is active in the wrong way you will lose money much faster than if you had just followed the market.

“We don’t expect investors to use the BEAR fund for set-and-forget investing says Ilan Israelstam, head of strategy at Betashares: “It is a more tactical product,” though Israelstam concedes there is no direction whatever given with any Betashares products except that investors feel free to “back their view”.

The BEAR fund was a “first” for the local market designed to go up when the market goes down and vice versa. ... the only problem is the market, for all its faults, has been on a steady (if low-key) upward trend since 2012.

“When you look at the GEAR fund and BEAR fund, they can’t both win that’s just the way it is,” says Israelstam.

Hopefully, the unique nature of one-off ETFs, where the mechanics are designed by the in-house team at the provider rather than as a basic reflection of well known indices, is becoming a lot more clear as Betashares, and others like them, separate the bulls from the bears ... and winners from losers.