How this ASX ETF lets investors cash in on a stock market crash

Feeling a bit bearish? This ETF makes cashing in on crashes possible…
The post How this ASX ETF lets investors cash in on a stock market crash appeared first on The Motley Fool Australia. –

Long-term investing usually involves taking advantage of short-term market weakness. Though, sometimes shareholders want to hedge against a possible stock market crash. Considering the S&P/ASX 200 Index (ASX: XJO) finished 0.85% lower to 7,286 points, now might be a good time to discuss how investors can profit during market weakness with an ASX-listed exchange-traded fund (ETF).

Short-term market volatility can wreak havoc on investors who were looking to sell in the near future, or rely on the market for an income. For those reasons and others, an avenue to capitalise on the ASX stock market falling can be appealing.

Let’s look at how BetaShares Australian Equities Bear Hedge (ASX: BEAR) offers this to its investors.

Turn that stock market crash upside down

The BEAR hedge ETF seeks to generate returns that are negatively correlated to the returns of the Australian stock market. Generally, a 1% fall in the market will result in a 0.9% to 1.1% gain in the ETF.

In order to achieve this outcome, BetaShares sells index futures contracts. This act of selling a contract before buying is known as short selling. The objective for investors to make a profit is to buy the contract back at a lower price and pocket the difference.

However, it is important to know that the opposite is true as well. For example, if the Australian stock market rallied, rather than crashed, investors would be losing money.

Another important piece of information is the management fee for this actively managed fund. Investors can expect to incur a 1.38% management cost per annum with the BEAR ETF.

The intended scenario for this investment is a short-term position. For example, between 21 February 2020 and 20 March 2020, investors could have made a 40.18% return during the COVID-19 crash.

Finally, it’s worth keeping in mind that the ASX stock market has always gone up over the long term.

The post How this ASX ETF lets investors cash in on a stock market crash appeared first on The Motley Fool Australia.

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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.

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