In this episode of Aussie FIRE, Dave and Hayden dive into the complex but fascinating world of leveraged investing.
They explore three tools that Australian investors might consider when looking to amplify their share market exposure: margin loans, NAB Equity Builder, and geared ETFs.
Each option has unique characteristics, risks, and trade-offs, making this an essential listen (or read) for anyone considering adding leverage to their strategy.
Why leverage at all?
Leverage has a certain appeal for some who are chasing Financial Independence . If done wisely, it can have the potential to help investors reach their goals sooner.
Instead of slowly accumulating wealth dollar by dollar, leverage allows you to control a larger portfolio from Day One. But this comes with risk: when markets go up, your returns are magnified. But when they fall, so are your losses.
Many investors are comfortable using leverage to buy property but hesitate to do the same with shares. Why? Part of it comes down to visibility. Property doesn’t get repriced every second, so price declines often go unnoticed until you sell. Shares, on the other hand, are marked to market daily, making their volatility more emotionally confronting.
As Hayden puts it: “I can't see why the top 200 Australian companies are considered a more unsafe investment than a townhouse in Leppington in Sydney.”
This disconnect between perception and reality highlights why understanding the mechanics and psychology of leverage is so important before diving in. Of course, property and shares (even for large companies) carry a range of different risks. Keep reading to understand how these differences can impact you.
Margin loans: simple in theory, risky in practice
Margin loans allow you to borrow money against your existing share portfolio to invest in more shares. It's a concept familiar to property investors, like using equity in one home to buy another.
But margin loans come with a unique risk: the dreaded margin call . If your investments fall below a certain value, the lender can force you to top up your account or sell assets, often at the worst possible time.
Dave explains the trade-off clearly: “You’re essentially taking a guaranteed cash flow loss in the hopes that you make it up with capital growth .”
That cash flow loss comes in the form of interest, which is currently around 8% to 9%. While some of this cost can be offset through tax deductions, the numbers still don't look great – especially in an environment of rising rates and uncertain market performance.
Another factor to consider is psychological. Watching your portfolio drop 30% is hard enough. Knowing you might be forced to sell during that drop? That’s even harder.
NAB Equity Builder: a mortgage-style alternative
Unlike margin loans, NAB Equity Builder offers a more structured approach. It's similar to a home loan but used to buy shares or ETFs . You provide a deposit and repay the remaining loan over a fixed period with regular principal and interest repayments.
The big drawcard is the absence of margin calls. No matter how much the market drops, as long as you continue making your scheduled repayments, NAB won’t liquidate your portfolio. For some, this makes it a more psychologically comfortable way to borrow for investing.
However, there are possible downsides. The interest rate is around 7.75%, which is higher than most mortgages. There’s also a limited choice of approved investments and the product’s exclusivity (currently only NAB offers it) means less competition and less flexibility. And, unlike margin loans, you must repay both interest and principal over time, increasing your monthly commitment.
Geared ETFs: easy access, hidden complexity
Geared ETFs (also known as leveraged ETFs ) allow investors to buy exposure to a leveraged version of an index without applying for a loan. Everything is managed internally by the ETF provider, making it simple to access leverage with the click of a button. But that simplicity masks a fair bit of complexity under the hood.
Dave breaks it down: “They’ll take like a dollar of assets… and then you end up with $2 of assets in the portfolio as exposure, when there’s only $1 of equity.”
These ETFs rebalance daily to maintain a target leverage level, usually around 2x. This means that if the underlying index rises or falls, the ETF adjusts its exposure each day to retain that 2x leverage.
While this keeps the leverage consistent, it also introduces something called “volatility drag” or “time decay”. Essentially, in a volatile market, the daily ups and downs compound in a way that can erode returns over time. So even if the index eventually recovers to its original level, a geared ETF might still underperform due to the cumulative effects of this rebalancing process.
During a sharp market downturn like the COVID crash, these funds can fall dramatically. For example, GEAR, a geared ASX 200 ETF, dropped over 65% in a month. The emotional toll of seeing such large losses, especially without a full understanding of how the fund operates, can be significant.
Wealth-builder ETFs: a smarter version?
Betashares has also launched a suite of "wealth builder" ETFs like G200 (ASX 200), GNDQ (Nasdaq 100), and GHHF (global diversified). These funds use direct borrowing rather than derivatives, keep gearing more conservative (around 30–40%), and currently charge lower fees.
Hayden appreciates the improvement: “These new Betashares ones… seem really interesting because I feel like I get the concept of it.”
These funds aim to offer leveraged exposure while reducing volatility drag. The borrowing is at wholesale rates, which are typically better than what retail investors could access, and the lower fees make them more competitive. However, the embedded interest isn't tax-deductible for individual investors, and as newer products, their long-term performance is still untested.
Still, they represent a step forward, combining the simplicity of ETFs with better design for long-term investors.
Who should consider using leverage?
Leverage isn't for beginners. It’s generally for people with experience, emotional discipline, a high risk tolerance, and a financial buffer to absorb short-term losses. Dave and Hayden are aligned on this: it’s not about whether leverage works, it’s whether you can stick with it through the rough patches.
Hayden offers a vivid reminder of what that looks like:
“By early April, you're going to be logging into your account and you're going to see that you're down like 70, 80 grand and you only put in 100," he says. "That's a real, practical example of what you have to be mentally prepared to witness.”
People likely to need access to their money, such as first-home buyers or parents with changing financial needs, should be especially cautious. Leverage works best when you can stay invested for the long haul and avoid selling during downturns .
Weighing up the options: which leverage path suits you?
Each of the three tools discussed – margin loans, NAB Equity Builder, and geared ETFs – offers a different path to potentially magnified returns.
Margin loans can provide flexibility but come with margin calls and high costs. NAB Equity Builder offers structure and protection but demands consistent repayments and locks you into one lender. Geared ETFs are the simplest to access, but their daily rebalancing can lead to unpredictable results over time.
In the end, leveraging your investments is a personal decision. If you’re financially stable, mentally prepared, and committed to the long term, it could be a powerful tool. But if there’s any doubt, consider advice from a financial adviser and remember it’s okay to keep it boring. Sometimes the slow road is the one that gets you there fastest.
We're always keen to hear your thoughts and topic suggestions, so hit us up at hello@aussiefirepod.com . Head over to Pearler for resources, calculators, and community insights that complement what we chat about on the show.
Until next time, keep dreaming big and living on your terms. Catch you on the next one, and happy long-term investing.
Dave and Hayden
All figures and data in this article were accurate at the time it was published. That said, financial markets, economic conditions and government policies can change quickly, so it's a good idea to double-check the latest info before making any decisions.