Bonus: How do leveraged ETFs work?

Leverage can supercharge your gains… or wipe you out.

In this bonus clip from our previous episode with Bryce from Equity Mates, we break down how leveraged ETFs work, why they’re tempting, and the real risks behind those big returns. Hear how leverage can range from cautious gearing strategies to the “rollercoaster” of triple-leveraged Bitcoin.

Plus, lessons from Warren Buffett’s 50+ years of investing, and why even the legendary stock picker backs simple index funds for the long haul.

For more or to watch on YouTube—check out http://linktr.ee/sharedlunch

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Episode Transcript

Speaker 1 (00:11):
You mentioned leveraged ETFs before, I wonder if you want
to dig.

Speaker 2 (00:14):
Into it a little bit. Yeah, So I'm a big
I'm a big fan of leverage, and I guess for
those that are unsure of what leverage is, just think
of it as like your home loan. You put in
a deposit and then you get a loan from the
bank to give you. You know, you put in one
hundred thousand, but you actually get to go out and

(00:36):
buy a million dollar property. And so what you're putting
in is amplified by the loan that the bank gives you,
and that applies to investing generally. But ETFs now give
you leveraged exposure. So what it means is for every
dollar that I invest in the ETF, the ETF provider
might go out and invest two dollars on your behalf

(00:58):
because of the way that it's structured, and what it
gives you is, as I said, an amplified exposure. They
do come with a lot of risk though, because some
of them are two times exposure three times exposure. And
what that means is, let's say you know, the ETF
goes up five percent in one day. If you have
two times it's going to go up ten percent. If

(01:20):
you have three times, it's going to go up fifteen percent.
Now that sounds awesome and you can make a lot
of money doing that, But with leverage, it goes the
other way as well. So if it goes down five
percent one day, it'll actually go down ten or twenty
percent or whatever the sort of gearing ratio is. So

(01:40):
it's something that you need to be very very clear
on why it is in your portfolio, and you need
to be very conscious of the impact that it can
have on your total returns. There are some products that
are available at the moment that have very moderate gearing,
and I think it reflects the demand from retail investors
at the moment to kind of get into these interesting,

(02:01):
sort of more sexy ETFs. So I would say, but
just be careful because now you're seeing crazy leveraged ETFs
out there. You've got leveraged bitcoin, Like, why would you
want to go leverage bitcoin three times? Leveraged bitcoin? Bitcoin
can rip thirty percent in one day, like you would
be up and down, you'd be a rollercoaster. Leverage, Tesla,
leveraged you name it. There There are plenty out there,

(02:23):
So buyer beware and really understand what.

Speaker 1 (02:26):
You're buying and whose money is that at.

Speaker 2 (02:29):
The end, like it's your money. But as I said,
whilst it can be incredibly fun on the way up,
you can lose it very quickly on the way down.
For example, I have two leveraged ETFs. One is leveraged
to the US, one is leveraged to this train market,
and over the liberation period I watched it creater. You know,

(02:53):
tens of thousands a day, thirty forty draw down. If
you're in a position where a you've invested money that
shouldn't be in the stock market altogether, or be you've
invested your deposit for a house for example, or you

(03:13):
didn't really understand the impact that that could have. Seeing
your portfolio drop forty percent in twenty four to forty
eight hours could be life changing, Like it could really
impact you.

Speaker 1 (03:26):
How did it feel when it happened to you?

Speaker 2 (03:27):
Well, luckily, yeah, I was like, oh God, so luckily.
I've been through it before with COVID and for me,
very long term time horizon here. And the thing that
I always remind myself is there is not a twenty
year period in the US market, particularly, there is no
twenty year period that you could find where from beginning

(03:50):
to end you would have lost money. And also we
would look back at any market crash and wish we'd
bought more. And so for me, like, sure, the market
ripped and my portfolio absolutely created, and I was like,
this sucks, this hurts, but like, I'm fortunate enough to
have been doing this podcast a while to know that
it's not the be all and end all, and if anything,

(04:13):
it's not only going to recover, but it's going to
continue to recover and go to all time highs at
some point in the future. So for me, I understood
what was happening in my portfolio. But if you've just
bought them blindly and seen the pullback, you could have
had a different I guess feeling of what investing is.

Speaker 1 (04:32):
And by the sounds of it, it's like you run
a pretty diversified portfolio.

Speaker 2 (04:35):
So my portfolio is I run a core satellite approach,
which is a very simple investment investment strategy. It's where
you think of it like that your house. You're building
the foundations, you're building the core, something that is going
to sustain and last for a very very long period
of time and that's done using index ETFs, and so
I split mine in four. I have an index ETF

(04:58):
that tracks the US, one that tracks Australia. Both of
those are leveraged. Then I have one that tracks all
of Europe, and then I have one that tracks Asia.
So really what I've got there is four ETFs that
have global exposure. It doesn't matter if I guess the
advantage of that is if US is doing really well
and Asia is not doing so well, they kind of
balance each other out and vice versa. At the moment,

(05:20):
we're seeing US pool back a bit, Europe's going really well,
and so as a whole, my portfolio kind of like
acts as like the bedrock of my investments, which then
gives me the enjoyment or the security in some way
to take the remaining twenty percent and invest it in
some of the thematic ETFs. So, for example, I've got

(05:42):
one that just tracks tech companies. Here in Australia, we've
got some great tech companies. But I don't want the banks,
I don't want the miners, I don't want retail, I
just want tech. So one that tracks tech. I've got
one that tracks semiconductors. As I've said, and then a
few individual stocks. So the idea with that part of
the portfolio is that you can a have a bit
of fun, hone your craft in investing in individual stocks,

(06:06):
but also try and beat what you're doing in the core.
But I know that because it's only twenty percent. If
I suck and that has does really poorly, I still
got eighty percent in what I know and believe is
going to be a very good long term investment.

Speaker 1 (06:20):
Yeah. So I always think of it as like the
garnish or it's like that's just your taste, like that's
that's the stuff that makes your portfolio unique to you
and interesting to you. But that strong foundation is like
you know, I like a good to me as good
sleep at night, as priceless. So I just like never
and missed in a way that i'd be that would
ever like contribute to a sleepless night something that whatever.

Speaker 2 (06:42):
It was happening, and that all comes. Yeah, it's a
good point. Like you can we see a lot of
portfolios come through the community and some people might have
crypto as their garnish, or they might have just stocks
from Europe as they're garnish, and yeah, it's a good
way to put.

Speaker 1 (06:54):
It, Yeah, what makes it interesting?

Speaker 2 (06:57):
Yeah?

Speaker 1 (06:57):
Actually, and I.

Speaker 2 (06:58):
Should say I should say as well though, if you're
just starting, you don't need to worry about the garnish
like you don't have to do that. You can just
have a core as your investment portfolio and that's it.
You can just choose index ETFs and away you go.
So don't feel like you need to have it at
a little bit of flavor and spice. But if you

(07:18):
I find what a lot of people do is they'll
start with the core. Get comfortable that haven't lost all
my money. I'm starting to get interested in this. You
know what I might experiment around.

Speaker 1 (07:27):
The sides awesome And so we you know, last time
I caught up and we've already talked about like Warren Buffett.
He's come up in our chat today. It's hard to
talk about and visiting about bringing up Warren Buffett. So
he's stepped back from his role. What do you any
thoughts on them?

Speaker 2 (07:44):
I mean it's it's sad. So he stepped down a
CEO of Berkshire Hathaway, which is his holding company or
his investment vehicle. We did a segment on it recently
and he has delivered five point five million percent since gosh, yeah,
five point five million percent since he started Berkshire back

(08:06):
when he was mid thirties or whatever it was, which
is just an incredible investing story. He's delivered almost twenty
percent year on year for fifty years, which is unprecedented.
I don't think anyone will ever do that again. So
for him to be stepping out of the investment ecosystem,

(08:27):
I think we're definitely going to miss him because he
has provided so much value to me, to Alec, the
other Hulf Equity mates, to a lot of people around
the world. Really his investment letters that he does every year,
the books that he's written like just full of full
of wisdom. So it will be sad to see him go,
But I think what he's built the company is enduring

(08:50):
beyond obviously himself. He's got someone his sidekick, stepping in
to continue running Berkshire, and I would be surprised if
that immediately changes over night. But I think the biggest
thing I've learned from him and Charlie, his co founder,
was it just goes to show what like staying mentally

(09:11):
active for as long as possible I think has serious
positive implications on your health and and your lifespan. Charlie
died at ninety nine, Warren's going to turn ninety five
this year, and they both Warren is still and Charlie
was until the day died so mentally active in investing.

(09:33):
And I'm not saying it has to be investing, but
I think one of the big things I reflect on
on both of those is just staying engaged and staying
mentally active, I think is something that I will remember
them both by for sure.

Speaker 1 (09:45):
Yeah, awesome. And I think the other thing is like
it really breaks the mold around like, you know, I
think one of the world's most successful in visitors. But
yet the approach is so kind of simple and easy
to understand, you know, and it's often like this cool

(10:07):
calm voice which hints the wisdom, like everyone's got their
favorite quote. Yes, And I think it's that thing that goes, hey,
it's not just good beginner advice, it's just good investing,
you know. It's just it's just like like you know,
the courset, like all these different ways of approach, like
approaching investing, dollar cost averaging, you know, these things. It's
not just when you get started, it's actually you know,

(10:28):
these are really good tools that can lead to really
great successful I agree. I think he's been a really
good person that.

Speaker 2 (10:35):
Positive like so like life lessons, business lessons, and I
think to tie it back to ETFs is he's realized
over his fifty years of investing that the best investment
really for long term is the index ETF, so much
so that he've said that ninety five percent of his
wealth when he dies, which is hundreds of billions of dollars,

(10:59):
is going to be put into a low cost global
index fund. And because he's so confident that that, over
a long period of time, is more than that needs.
And so for someone who's spent his whole life picking
stocks to come out and say that that that you
don't need anything more than that, I think, like, you know,

(11:21):
you've got to pay attention to