Geared ETFs in Australia: How They Work (and Why They're Not for Everyone)

What is a geared ETF?🔗

A geared ETF borrows money at the institutional level to increase its market exposure beyond what investors put in. In plain English: you invest $1, the fund borrows another $0.50 to $0.65 on top, and it invests the combined $1.50 to $1.65 in the market. That borrowing happens inside the fund, which is what "internally geared" means. You never take out a loan yourself; you just buy units on the ASX like any other ETF.

Why does the "internal" bit matter so much?

• No margin calls. If the market falls sharply, the fund manages the gearing internally. You will not get a phone call demanding you top up within 24 hours.
• Wholesale borrowing rates. The fund borrows at institutional rates, typically lower than a retail investor pays on a personal margin loan.
• Your loss is capped. You cannot lose more than you invested. The fund cannot come after your other assets.

In Australia, Betashares is the primary issuer of geared ETFs. They have run these products since 2014 and publish a detailed Product Disclosure Statement (PDS) and Target Market Determination for each fund.

Australian geared ETFs: the main options🔗

There are three geared ETFs worth knowing on the ASX. All are Betashares products, and all are classified as "hedge funds" under ASX rules, which is the exchange flagging them as complex. ASIC requires a Target Market Determination for each, confirming they are designed for investors with high risk tolerance and long time horizons. That is a genuine filter, not boilerplate.

GEAR is the longest-established (since April 2014) and gears the Australian market, so its distributions carry franking credits. GGUS does the same for US large caps with the currency hedged back to AUD, so its distributions are typically unfranked. GHHF is the newer, more moderate option (launched April 2024): lower gearing means less amplification but a smoother ride, on a diversified base similar in spirit to DHHF.

How gearing amplifies gains and losses🔗

Let us do the maths, because this is the section that matters most. Assume GEAR is running at 50% gearing, so for every $1 of your equity the fund holds $1.50 of assets (your $1 plus $0.50 borrowed).

• Market rises 10%: assets grow from $1.50 to $1.65, repay the $0.50 borrowed, your equity is $1.15. A 15% gain on your $1.
• Market falls 10%: assets fall from $1.50 to $1.35, repay the $0.50 borrowed, your equity is $0.85. A 15% loss on your $1.

Then there is volatility drag. Even without gearing, a 10% fall followed by a 10% rise does not get you back to square: $100 x 0.90 x 1.10 = $99. With gearing, that effect is amplified, and the more volatile the market, the more it compounds against you over time. This is not a flaw unique to any issuer, it is the maths of leverage plus compounding.

One structural point in Australia's favour: US "daily reset" leveraged ETFs rebalance their gearing every single day, which creates severe decay and makes them short-term trading tools. GEAR and GGUS instead rebalance only when gearing drifts outside the target range, which reduces (but does not remove) the drag and makes them more suitable for longer holding.

The real risks (read this twice)🔗

• Magnified drawdowns. When the market falls, a geared ETF falls harder. GEAR fell far more than the ASX 200 in the March 2020 COVID crash and again in the 2022 rate-rise drawdown. In a severe bear market a geared fund can lose 40% to 60% even if the index "only" falls 25% to 30%.
• Gearing costs. The fund pays interest on its borrowings, deducted from returns continuously. When the RBA lifted rates aggressively in 2022 and 2023, those costs became a real drag even as markets recovered.
• Volatility drag. Choppy, sideways markets erode geared returns over time through the asymmetry of percentage gains and losses.
• Sequencing risk. A 40% loss needs a 67% gain to recover; a 60% loss needs a 150% gain. Invest a lump sum right before a drawdown and recovery can take years.
• Psychological risk. Watching an investment halve is genuinely hard. Panic-selling at the bottom turns a temporary drawdown into a permanent loss. If you are not certain you can hold through that, a geared ETF is not for you.

The honest case for (if you still want to know)🔗

We have been blunt about the risks. For the right investor, here is the fair case. Over very long periods, geared exposure to quality indices has historically produced higher returns than the ungeared equivalent, with dramatically higher volatility (the key word being "historically"). It suits someone with a genuine 10-plus year horizon and high risk tolerance, who keeps it a small satellite (say 5% to 15%) in an otherwise diversified portfolio.

Geared ETF vs ungeared ETF vs DIY margin loan🔗

The tax treatment in Australia🔗

Distributions are taxed as ordinary income in the year you receive them. GEAR holds Australian shares, so franking credits flow through and the grossed-up yield can be meaningfully higher than the cash yield. GGUS holds US shares, so its distributions are typically unfranked. Standard capital gains tax applies when you sell, with the 50% CGT discount available if you have held for 12 months or more.

One important difference from a DIY margin loan: the interest the fund pays on its borrowings is deducted at the fund level, so you cannot personally claim it as a tax deduction. With your own margin loan the interest may be deductible (subject to ATO rules). That is a genuine trade-off to weigh, and worth running past a registered tax agent for your own situation.

Who geared ETFs suit, and who should avoid them🔗

They may suit you if you have a genuine 10-plus year horizon, genuinely high risk tolerance (you have thought hard about a 40% to 50% drawdown), you keep them a small satellite in a diversified portfolio, and you can commit to holding through downturns without panic-selling.

Avoid them if you have a short horizon or might need the money within five to seven years, you are a nervous investor, you would make them a large chunk of your portfolio, you are a retiree relying on this capital, or you are a beginner who has not yet built a diversified, ungeared foundation. If the return upside is the main thing drawing you in and you have not fully internalised the downside, that is the clearest signal to wait.

Frequently asked questions🔗

Sources🔗

1. Betashares, GEAR (Geared Australian Equity) product page and PDS, betashares.com.au
2. Betashares, GGUS (Geared US Equity, currency hedged) product page and PDS
3. Betashares, GHHF (Wealth Builder Diversified All Growth Geared) product page and PDS
4. ASIC Moneysmart, Borrowing to invest, moneysmart.gov.au
5. ASX, ETF investor education, asx.com.au
6. Australian Taxation Office, Capital gains tax, ato.gov.au

General information only, not personal financial advice. Geared ETFs are very high-risk products. Read the Product Disclosure Statement and Target Market Determination for any product you are considering, and speak to a licensed financial adviser before investing.