This ETF put investor returns into top gear during the recovery

If you thought the returns from the ASX 200 were good since the COVID-19 crash, here's an ETF that shifted the ASX gear to the next level.

| More on:

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As investors, we're always on the hunt for the best returns. Well, one Aussie exchange-traded-fund (ETF) has managed to gear up ASX returns by more than 100% since the COVID-19 crash. This is pretty mind-boggling, considering its holdings mirror the ASX 200. So, what's the secret?

Leverage magnifies ASX returns… and risk

The last 15 or so months have been golden for investors going long on the ASX share market.

If you had invested in the S&P/ASX 200 Index (ASX: XJO) at the very bottom of the COVID-19 crash on 23 March 2020, you'd have returned 61.6%, which is not to be sneezed at.

However, BetaShares Geared Australian Equity (Hedge Fund) (ASX: GEAR) took the recovery returns to a whole new level. In the same time frame, the leveraged ETF has increased 182% in value, significantly outstripping the benchmark index.

But how? The difference is a thing called leverage. It's the same as when buying property – most people take out a loan so they can purchase a higher dollar-value property. Leverage in the stock market is essentially the same – but instead of a house, it's ASX shares.

It's important to note, applying leverage magnifies both returns and losses. If the benchmark index falls, a leveraged investment will fall more. And whether you're making money or losing it, you'll still have to pay interest on the loan amount.

According to BetaShares, one advantage of its GEAR ETF is the lower cost of borrowing. The fund makes this possible by using its size to borrow at cheaper rates than those available to individuals. This cost is wrapped into the 0.8% per annum management fee charged.

Not everyone is a fan

Despite delivering market-beating returns since the crash, not everyone is cheering for leveraged ETFs. In fact, Stockspot founder Chris Brycki thinks they shouldn't be classed as ETFs at all:

I don't think they should be classed as ETFs, they are basically dangerous structured products. Even if you get the direction right, these are terrible products to use because the compounding of daily returns makes them not appropriate as investments.

Even BetaShares managing director Alex Vynokur advises leveraged ETFs should not be used as a standalone investment. Instead, he says the product could be considered more of an insurance policy within a diversified portfolio.

Should you invest $1,000 in Australian Foundation Investment Company Limited right now?

Before you buy Australian Foundation Investment Company Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Australian Foundation Investment Company Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ETFs

ETF spelt out with a piggybank.
ETFs

Want to buy ASX growth shares? Consider these ETFs instead

Growth ETFs can be easier to invest in than shares.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
ETFs

Buy these ASX ETFs for an income boost after the RBA's interest rate cuts

These funds offer income investors some good yields.

Read more »

Woman relaxing on her phone on her couch, symbolising passive income.
ETFs

How to own a portfolio of blue chip ASX stocks in a single trade

This ETF gives you the top Aussie stocks in one foul swoop with an added twist.

Read more »

A bearded man holds both arms up diagonally and points with his index fingers to the sky with a thrilled look on his face over these rising Tassal share price
ETFs

3 exciting ASX ETFs to buy for the long term

Want to invest in global megatrends? These funds could help you.

Read more »

Happy couple enjoying ice cream in retirement.
ETFs

Create a reliable income stream: 3 ASX ETFs with quarterly distributions

These funds pay you every three months to own them.

Read more »

Man looking at an ETF diagram.
ETFs

Where to invest $10,000 into ASX ETFs this month

Let's see why these funds could be worthy of investor attention right now.

Read more »

A man wearing a red jacket and mountain hiking clothes stands at the top of a mountain peak and looks out over countless mountain ranges.
ETFs

3 reasons why the Vanguard Australian Shares Index ETF (VAS) is a good buy for the long-term

The VAS ETF has a number of pleasing characteristics.

Read more »

A stopwatch ticking close to the 12 where the words on the face say 'Time to Buy' indicating its the bottom of the falling market and time to buy ASX shares
ETFs

3 of the best ASX ETFs to buy and hold for 10 years

These funds could be quality picks for buy and hold investors. Let's find out why.

Read more »