Should I Buy BBUS ETF 2021?

BBUS offers a unique tool for investing experts to gain an inverse or short exposure to the S&P 500, the most quoted index in the world. BBUS brings a lot of unique risks and considerations. Should I Buy BBUS ETF?

Should I Buy BBUS ETF: Pros and Cons

Who Should Buy BBUS ETF?

BBUS is used by sophisticated investors as an instrument to hedge and profit from US market downturns. A 1% fall in the U.S. share market on a given day can generally be expected to deliver a 2% to 2.75% increase in the value of the Fund (and vice versa).

The BetaShares U.S. Equities Strong Bear Hedge Fund – Currency Hedged (ASX: BBUS) provides a simple way to generate magnified returns that are negatively correlated to the U.S. sharemarket.

BBUS is geared to deliver a short interest of -200% to -275% on a given day. Over the long term, short exposure may fall outside these brackets due to rebalancing and compounding.

Uses for BBUS:

• Hedge a portfolio of U.S. shares against a decline in the U.S. sharemarket
• Access the potential for leveraged returns if the U.S. sharemarket falls

Given the historic returns of the US share market and the nature of geared shorting used in BBUS, the fund is often not suitable over long-term periods.

Gearing magnifies gains and losses and may not be a suitable strategy for all investors. 

Ensure to read and understand the PDS and discuss with an investment professional.

Should I Buy BBUS ETF: Facts

*The fund holds 3 holdings currently: Including AUD, USD, and S&P 500 Futures

BBUS ETF Price

About BBUS ETF ASX

BBUS is the second-largest ASX-listed Bear-hedge fund, behind its Australian equities equivalent BBOZ. The fund was started in 2015, given the incredible bull-run of the S&P 500, BBUS unsurprisingly has poor performance over the time period.

BBUS isn’t designed for long-term holders but acts as a hedge fund and an instrument to bet against the S&P 500, usually over a short-term period. We tend to see spikes in volumes to BBUS related to share market volatility and rises in the VIX.

Beatshares is an Australian ETF provider, as such BBUS is only listed domestically. The fund has just over $190 Million in FUM.

BBUS targets a return that is negatively correlated to the return of the U.S. share market. BBUS seeks to generate magnified returns: specifically a relationship of between -200% and -275% on a given day.

BBUS Share Registry: Link Market Services. Through Link, you can manage your holdings and communications.

BBUS is domiciled in Australia meaning it is a registered fund in Australia for tax purposes. Investors who buy into this ETF, and are Australian residents for tax purposes, will be subject to Australian taxes and regulation. Because of this investors have no need to complete a W-8BEN form.

BBUS Portfolio Goal

BBUS Seeks to generate magnified returns that are negatively correlated to the returns of the U.S. share market. BBUS expects to generate a magnified positive return when the S&P 500 total return index falls (and a magnified negative return when the index Rises). Source, Betashares

How does BBUS ETF work?

BBUS seeks to generate magnified returns that are negatively correlated to the U.S. share market, specifically a relationship of between -200% and -275% on a given day.

The fund achieves this by selling share index futures contracts in the S&P 500. The exact instrument used is the S&P500 E-Mini Futures. As a result, the fund may not be exactly proportional to the S&P 500 index but will be proportional to futures. These should show a similar trend.

Typically, equity index futures prices and the relevant sharemarket index move in parallel, and so in the hours when the sharemarket is open, price movements in the Bear Funds will reflect movements in the physical sharemarket.

It is important to remember that BBUS operates using Future contracts, not the S&P 500 itself. Futures markets are contantly open. As such, returns may not always be reflective of the S&P 500.

The fund is able to achieve a geared short position of -200% and -275% by trading on margin. This is used to amplify gains and losses.

If the Fund maintained a short position equal to 275% of the Fund’s Net Asset Value (being the maximum anticipated gross short exposure the Fund will adopt), then a 10%
fall (or rise) in the U.S. stock market on a given day could translate into a 27.5% rise (or fall) in the value of the Fund.

Here’s an example in practice:

The level of margin is reviewed daily by the fund to ensure it is within the limit. In order to maintain this, the fund will be frequently rebalanced. For shareholders, over time the individual gearing of the fund will fall outside of the range. It may only be within the range on a given day.

What are Futures? Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date. Source, Investopedia

By selling futures contracts, BBUS agrees to sell the underlying assets of the S&P 500 at a given price by the future date. If the S&P 500 falls in value, BBUS is set to gain. On the expiration date, the futures contract can be settled in cash.

Can I lose more than my initial investment when investing in the Bear Fund series?
No. An investor in the BetaShares Bear Fund series cannot lose more than their initial investment.

BBUS Benchmark index: Geared Inverse S&P 500

BBUS is benchmarked against the S&P 500 300 (ASX: INX). The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The index is widely regarded as the best single gauge of large-cap U.S. equities.

Standards and Poors

Standards and Poors 500 is a market-capitalization-weighted index, meaning each company included is in proportion to the float market value.

The index is also float-adjusted, meaning that the index only counts those shares that are available to investors and excludes closely-held shares or shares held by governments or other companies.

The index was created by Standards and Poors (S&P) on March 4th, 1957.

S&P 500 Methodology

• Eligibility Market Cap: Market capitalization must be greater than or equal to US$13.1 billion, and must have a float-adjusted market cap that is atleast 50% of the underlying minimum market cap threshold.
• Public Float: Companies must have an investable weight factor of at least 0.10.
• Financial Viability: Companies must have postive as-reported earnings over the most recent quarter, as well as over the most recent four quarters (Summed together)
• Liquidity and Pricing: The ratio of annial dollar value tarded (average closing price over the period multipled by historic volume) to floar-adjusted market capitilsation should be at least 1.0, and the stock should have a Minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date
• Universe: The company must be from the U.S.
• Sector Representiation: Sector balance, as measured by a comparison of each GICS sector’s weight in an index with its weight in the S&P Total market Index, in the relevant market capitisation rangem is also considered in the selection of companies for the indices.
• Company Type: All eligible US common equities on eligible US exchanges can be included, REITs are also eligible for inclusion. Securities that are ineligible for inclusion in the index are limited partnerships, master limited partnerships and their investment trust units, OTC Bulletin Board issues, closed-end funds, exchange-traded funds, Exchange-traded notes, royalty trusts, tracking stocks, preferred stock, unit trusts, equity warrants, convertible bonds, investment trusts, American depositary receipts, and American depositary shares. Source: Standards and Poors

Remember BBUS is a Bear equity fund, that bets against the S&P 500. For funds that invest in the S&P 500 you may be interested in IVV, read about IVV here.

S&P 500 Holdings

Due to the nature of the US economy, the S&P 500 is weighted towards the technology sector. Information Technology accounts for 27.8% of holdings. In our top 10 holdings, eight of the constituents are technology-based. These eight holdings account for 25.33% of the entire index.

S&P 500: Top 10 holdings

1. Apple (6.1%)
2. Microsoft (5.94%)
3. Amazon (3.75%)
4. Facebook Class A (2.3%)
5. Alphabet Class A (2.24%)
6. Alphabet Class C (2.13%)
7. Nvidia (1.45%)
8. Berkshire Hathaway Class B (1.42%)
9. Tesla (1.42%)
10. JP Morgan Chase (1.29%)

The top 10 holdings represent 28.04% of the total ETF.

S&P 500 Fundamentals

In this data, we can see the average fundamental factors across the S&P 500 holdings. We can see the weighted average PE ratio is 33.24x, the price to book is 4.73x and the ROE is 29.24%.

In the below graph we see the average PE range of the S&P 500. We can see the average range is 15-30. In the past year, we see a massive spike in the average PE ratio. This is due to the COVID recession which saw company profits plummet as prices have since recovered. In future earnings seasons as we see profits return this PE ratio will return to the average.

BBUS Holdings

• Cash and Cash Equivalents: 85% or more of the Fund’s net asset value
• Exchange-traded derivatives (being S&P 500 futures contracts): 15% or less of the Fund’s net asset value

BBUS invests its assets into cash and cash equivalents, namely AUD and USD, as well as selling equity index futures contracts in the S&P 500. Selling S&P 500 futures can generally, be expected to generate a positive return when the S&P 500 index declines on a given day (and a negative return when the S&P 500 index increases).

Selling futures contracts in the way described above is a form of short selling. Since all of the futures tradings is done within the Fund, investors are not exposed to the requirement to pay “margin calls” in the event that the futures positions incur losses.

Gearing

BBUS does not borrow funds in order to achieve leverage. Instead, gearing is achieved through future contracts which require minimal principle in order to invest. Gearing allows the magnification of both gains and losses.

BBUS aims to maintain the Fund’s short exposure to the S&P 500 index between 200% and 275% of the Fund’s Net Asset Value on a given day.

BBUS ETF Fees

• BBUS Management Fee: 1.19% p.a
• Expenses (Capped at): 0.19% p.a
• Indirect Costs: 0%
• Bid/Ask Spread: N/A

How are Management Fees Paid?

Management fees are automatically calculated and accrued on the fund’s Net Asset Value on a daily basis. This means is you as an investor never have to directly send money to Betashares. It is all processed by the fund as they deduct the fees from the underlying earnings/capital of the fund on or after the first day of the following month.

Because of this you never really notice the fees, instead, it just reduces the fund’s performance over time. When the fund sends out their AMMA statement at tax time you can see the full details of this.

BBUS Recoverable Expenses

BBUS charges recoverable expenses capped at 0.19% p.a. These expenses represent the additional operating expenses associated with running the fund. These funds are calculated and paid just like the management fees.

Since the expenses are capped at 0.19%, the fund may sometimes incur a fee greater than this amount which will be paid out at a later date to maintain the 0.19% cap. This is what the term 'Recoverable' refers to.

Bid-Ask Spreads

The bid-ask spread is the difference in price between the highest price that a buyer is willing to pay for a security and the lowest price for which a seller is willing to sell it. We have no current data on the average bid-ask spread of the fund. This can be seen in real-time through your broker when trading the fund.

• The narrower the spread the better, as this reduces the trading costs associated with buying and selling ETFs
• Exchange-based spreads, as on the ASX, are set by the competitive tensions between market markers
• Larger Funds will tend to have lower bid-ask spreads.
• Bid-Ask spreads are not set but constantly change throughout the day, depending on supply and demand.

Fee Comparison

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BBUS ETF Share Price: Performance

In the below table we set out the returns of BBUS compared to the S&P 500 Index over various time frames.

We have also compared the performance of BBUS to several other popular ETFs. They are expressed as average returns per annum.

Should I Buy BBUS: Competitors

Asides from 'ETF Securities', betashares is the only ASX provider of inverse ETF funds. In total there are four inverse hedge funds listed on the ASX:

BBUS: The BetaShares U.S. Equities Strong Bear Hedge Fund – Currency Hedged (ASX: BBUS) provides a simple way to generate magnified returns that are negatively correlated to the U.S. sharemarket.

BBOZ: BetaShares Australian Equities Strong Bear Hedge Fund is the ASX equivalent to BBUS. This fund operates by selling ASX 200 futures on margin. The managment fees are the same price as BBUS.

BEAR: BetaShares Australian Equities Bear Hedge Fund (BEAR) is similar to BBOZ as the fund also operates by selling ASX 200 futures on margin. Bear is geared less at a range of -90% to -110%. The management fees are also 1.38%.

SNAS: ETFS Ultra Short Nasdaq 100 Hedge Fund is a trading product offering negatively geared exposure to the Nasdaq-100 Index. SNAS provides exposure to the Nasdaq-100 Index within a target range of -200% and -275%. The management fee is 1%.

Other popular ETFs include: IVV, VDHG, VAS

Distributions

Since BBUS is a fund that operates as a trust structure the fund will pay out any excess capital on an annual basis. BBUS operates by selling S&P 500 futures, as such the fund won't derive any capital from dividends. Since BBUS does hold cash, interest may be accumulated.

• BBUS Distibution History: BBUS has not paid out any distributions since inception
• BBUS Payment Frequency: Annually
• BBUS Yield: N/A

Should I Buy BBUS ETF: Prophet's Take

BBUS is not used as a long-term investment strategy but is instead employed by sophisticated investors as a specialized investing tool.

BBUS is used to:

• Hedge a portfolio of U.S. shares against a decline in the U.S. sharemarket
• Access the potential for leveraged returns if the U.S. sharemarket falls

Short and leveraged exchange-traded products are only intended for investors who understand the risks involved in investing in a product with short and/or leveraged exposure and who intend to invest on a short-term basis. Any investment in short and/or leveraged products should be actively managed and very closely monitored, as frequently as daily.

Before making any investment in either Fund, prospective investors should carefully consider whether they are prepared to be exposed to significant losses on their investment.

Ensure to read and understand the PDS and discuss with an investment professional. No information discussed by Prophet Invest is Financial advice. Prophet Invest provides factual information only.

BBUS Factsheet

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