‘Geared’ share funds aimed at ‘mum and dad investors’ are getting a new push under a new formula

After a sharp decline, ‘gearing into shares’ is set to return through the unlikely doorway of index funds.

BetaShares CEO Alex Vynokur has launched two new funds seeking to reverse the decline in sharemarket gearing by everyday investors.

Australian investors will borrow up to the eyeballs for investment property, but when it comes to the share market they remain reluctant to introduce ‘gearing’ – that might be about to change with a major new play from fund powerhouse Betashares.

After experimenting with ‘leveraged’ trading products, the Australian-owned index fund manager is launching two ‘geared’ Exchange Traded Funds, aimed squarely at mum and dad investors.

The move is set to bring borrowing for shares back into the mainstream, while upending the notion of ETFs as risk-free products that merely mirror the returns of broader market indices. The new ETFs will borrow around one third of the money invested through the fund on behalf of investors.

Borrowing to finance share purchases was commonplace up until the GFC when investors got double whacked as the share market dropped by 50 per cent and the losses widened further due to investor borrowings.

At the peak of the rush for ‘leveraged’ shares in 2008 there were more than a quarter of a million Australian share investors using gearing – in the latest Reserve Bank report on the sector the number using margin lending on shares had shrunk to about 80,000 investors.

Financing share investing directly through margin lending loans has also become very expensive, with rates often near 10 per cent – creating a hurdle for success which has kept many investors out of the game.

“We know there are certain investors who could benefit from geared exposure to the sharemarket, while at the same time, the use of margin loans has declined in recent years” says Ilan Israelstam, chief commercial officer at Betashares.

“Investors understand the market is changing, and that ETFs have evolved – there has been leveraged products in the market for a decade,” he said.

‘But geared ETFs have not been mainstream,” said Stuart Wemyss of the ProSolution Private Clients.

“Investors need to remember the fund is borrowing to buy the shares – if there’s a share market crash then the fund may have to sell stocks to meet its obligations and that in turn would lead to more losses – there is no way around the fact that a geared product is riskier.”

“I would also note that the share market has run pretty hard this year, and we are close to all-time highs, investors need to approach gearing with a long-term view, Mr Wemyss said.

Investors can negatively gear shares, just like property, but most don’t often do it despite good returns and decent cash flow.

“A downside with this sort of fund is that you offer up the chance you would have had to do negative gearing if you had borrowed the money rather than letting the funds do it,” said Mr Wemyss.

But Wemyss also suggested moderately geared ETFs may offer advantages over existing leveraged products from both Betashares and VanEck in the local market.

He said packaging share leverage into an ETF is a strong option, with the funds getting much lower rates than individual investors. Big funds will pay much lower borrowing rates than individuals.

Betashares, led by chief executive Alex Vynokur, is launching the two ‘moderately geared’ funds on the ASX this week which are geared 30 to 40 per cent.

One fund covers the ASX 200 the other is a global ‘diversified all growth’ fund with a larger weighting to the Australian market than previous funds in this sector.

The ETF sector now has more than two million everyday investors on the books with more than $200bn under management as the industry continues to grow strong each year.