How to increase your exposure to dividends and franking credits

This interview was taped on Tuesday 18 June 2024.

While many Australians are very conscious of seeking to maximise their franking credits and dividends for income, it is a far smaller number that may have been considered gearing to boost exposure.

Why would they? After all, traditional gearing is sophisticated, complex and often accompanied by potential margin calls.

But, while this is still true of many forms of gearing, ETFs have changed the market. Betashares is aiming to evolve the game further with its two new Wealth Builder funds, designed to be long-term investments.

Cameron Gleeson, Senior Investment Strategist for Betashares, explains that making these products more suitable as buy-and-hold products to support capital growth and income generation comes down to the level of gearing.

“If we think about more traditionally geared products, often they have a very high degree of leverage. I think the secret with these funds is having that more moderate amount of leverage allows investors to ride out the downturns in a way which is obviously less volatile,” he says.

You might wonder where dividends and franking credits play into this.

Gleeson notes that Betashares' two newest funds - Betashares Wealth Builder Australia 200 Geared (30-40% LVR) Complex ETF (ASX: G200) and the Betashares Wealth Builder Diversified All Growth Geared (30-40% LVR) Complex ETF (ASX: GHHF) – hold at least a portion of Australian equities.

“The fund itself will collect dividend income or derive dividend income, and then it will pass through fund distributions to the unit holders of the ETF. Where franking credits have come through an Australian share, that will then be attached to the distributions of the fund,” Gleeson says.

The result for the end investor? Leveraged exposure to the market, and in turn leveraged exposure to the potential dividends and franking credits that may be offered on the market.

It’s not a risk-free approach, after all, if the market falls, your investment will be affected too – say you have 1.5x leverage, you might see your fund fall 1.5x the fall in the market. But with investors searching harder than ever to keep on top of inflation and the market running at highs, it merits a closer look.

In this episode of The Pitch, Gleeson explores gearing, accessing dividends and franking credits in an ETF and takes a closer look at the new Betashares Wealth Builder Funds.

Edited transcript

To begin with, you've recently launched two new geared ETFs. Can you give us a quick overview of each?

These Wealth Builder funds are designed to provide investors exposure to a diversified portfolio of Australian and global shares, but using a moderate degree of leverage, which can accelerate your wealth creation over the long term. These funds are internally leveraged, which means that the borrowing is managed by Betashares and wrapped up in the fund. 

The funds have a loan-to-value ratio or LVR of between 30-40% which means that, generally speaking, the funds will give you an exposure for about 1.5 times the movements in the daily underlying portfolio. 

The two funds are G200 which is exposure to the largest 200 Australian listed companies. Then we’ve got GHHF which is a diversified portfolio of around 4,000 Australian and global shares. I think if you’re going to use a geared solution, diversification is one of the keys to reducing that risk.

Are these both geared versions of your existing strategies?

If you think about the genesis of GHHF, it is based on the very popular Diversified All Growth ETF (ASX: DHHF), which is that all-in-one growth solution, both Australian and global equities. The Australia 200 ETF (ASX: A200) is a very popular fund of ours. It’s our Australian equity flagship fund and G200 is based on that fund, providing geared exposure to the same portfolio of stocks.

These funds are called Wealth Builder Funds. Would you use them more for growth or income or both?

Both funds are going to give you a combination of capital growth and income and are designed to do so. It depends on your circumstances and how you’re thinking about building your portfolio, whether or not you choose to, for example, turn on the dividend distribution reinvestment plan to allow that to capitalise or take income out as you go.

And what are the risks of using these types of strategies?

Obviously, the key risk with any geared product is that gearing will generally increase the volatility and therefore the riskiness of your portfolio – you’re going to see larger magnified gains and losses both up and down. That’s a clear risk there.

A second point to note is that each day if you were to look at the website, you’ll be able to see the current geared exposure of these funds. In other words, what is the relationship between the underlying portfolio and the return for the fund on that day? 

But, over the long term, returns of the fund can also be impacted by compounding, by rebalances, and by interest costs in the fund fees. So that’s another thing to take into account.

Then more broadly, the other risk or thing really to be aware of is that, just because the market goes up, it doesn’t necessarily mean that a geared fund will outperform an un-geared fund. In order for that geared exposure to outperform, you need the capital gains and income that it produces to eclipse the interest cost with regards to that geared exposure.

There are a few key things to look out for there. I would certainly be aware of when you’re looking to use any sort of geared product.

I'm going to revisit a point you made earlier about dividends. Can you get dividends and franking credits from using geared funds?

Yes, you can. Within this suite, we’ve got two funds, both of which hold Australian equities. In either case, you’re going to receive dividends because they are equity funds and they hold underlying shares in terms of that end exposure. 

Both G200 and GHHF hold at least a portion of Australian equities, so as a result, the fund itself will collect dividend income, or derive dividend income and then it will pass through fund distributions to the unit holders of the ETF. And where franking credits have come through from an Australian share, that will then be attached to the distributions of the fund.

As a unit holder in the ETF, when you get your distribution or tax statement at the end of July, that will actually show you the amount of franking credits attached to those distributions for the tax year.

Traditionally geared products are seen as more of a short-term solution. It’s not always the case with the new Wealth Builder funds you are offering. Why is this and what is the traditional lifecycle for these funds?

If we think about more traditionally geared products, often they have a very high degree of leverage. I think the secret with these funds is having that more moderate amount of leverage allows investors to ride out the downturns in a less volatile way. 

That’s the key to taking advantage of the market’s compounding power by using gearing if you can ride out the lows.

If I’m an investor with a very long time horizon and if I have a reasonable degree of risk tolerance, I can use this fund and allocate to it over many years to build my capital base before I become more risk averse and start de-leveraging or adding in geared exposures into my portfolio. It’s really about building up that wealth base when you have a long investment time horizon and taking advantage of that compounding power of the market.

Could you view it as a buy-and-hold strategy?

I absolutely think that this is for many investors who have that degree of risk tolerance, they can think of this as a set-and-forget strategy where they continue to invest constantly in the market. That’s how you compound your wealth over time, and using that bit of leverage just accelerates that growth in capital as the market rises over time.

How can investors use these strategies as part of their overall portfolio?

I think there are a number of really great ways these can provide a solution for people. For example, if we take an investor with a low capital balance to start with, looking to take advantage of the market’s compounding power. Using a dollar-cost average approach perhaps to grow their capital, because gearing allows you to have more exposure to the market from day one of your investment period.

Then you’ve got SMSF investors who might, for example, be constrained by the superannuation concession caps. Using gearing can allow you to take more exposure within your SMSF or indeed increase or enhance the number of franking credits you can generate within that tax-efficient structure.

Finally, investors who are looking to be more capital efficient with their investment or manage cash flow. For example, if I want to retain exposure to the stock market, but I also want to pay down my non-deductible debt like my mortgage on my house – this might be a way I can do that.

Build your wealth

Betasahares are excited to announce the launch of a new ‘Wealth Builder’ range comprising Australia’s first ‘moderately geared’ exchange traded funds on the ASX. The ETFs are anticipated to provide a gearing ratio generally between 30-40% on a given day. For more information, please visit the Betashares website.

ETF

Betashares Wealth Builder Australia 200 Geared (30-40% LVR) Complex ETF (G200)

Australian Shares

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ETF

Betashares Wealth Builder Diversified All Growth Geared (30-40% LVR) Complex ETF (GHHF)

Global Shares

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