Geared ETFs: bigger swings, bigger risks

What gearing changes

Gearing means using borrowing or certain derivatives to get more exposure to investments than you’d get with your own cash alone. If markets rise, gains can be bigger. If they fall, losses can be bigger too. Borrowing costs and the fund’s rebalancing rules also matter.

GHHF as an example

Betashares GHHF provides geared exposure to a diversified share portfolio. Betashares says the fund generally targets borrowing of 30-40% of its total assets and warns that returns can be affected by compounding and rebalancing. Its PDS describes the risks in detail. This is a product example, not a recommendation to buy it.

Being young is not enough

A long investing horizon can help some people tolerate volatility, but it cannot guarantee recovery. Job security, emergency savings, existing debts, how someone behaves during a crash and whether they can afford losses also matter.

What a market drop can look like with gearing

Imagine you put A$10,000 into an investment with roughly A$15,000 of share-market exposure and A$5,000 of borrowing. If the shares fall 20% before costs and other effects, the exposure loses about A$3,000. That's a 30% hit to your original A$10,000 equity, rather than 20% for an unborrowed A$10,000 exposure. A 20% rise could magnify gains in a similar simplified example.

Real geared funds can rebalance exposure, incur borrowing costs and change gearing through time. Their performance won't follow a fixed multiple in every market condition, and losses can become severe. Never assume long holding periods make gearing safe.

Questions to answer before considering one

1. Read the current Product Disclosure Statement (PDS), including how the gearing level is managed.
2. Understand borrowing costs, fees, distributions and the possibility of sharp or prolonged losses.
3. Check overlap with other funds and how much of your total savings the fund would represent.
4. Consider your emergency savings, job security and whether you'd still be able to meet expenses after a substantial decline.

A geared ETF isn't a beginner requirement or a shortcut to financial independence. It is a specialist product with risks worth understanding in detail.