What are Internally Geared Funds and Why Tech Professionals are using them

By Mo, Founder and Principal Adviser – My Wealth Choice, Sydney

As a financial adviser in Sydney with more than two decades of experience helping Tech Professionals reduce taxes and grow their wealth, I’m often asked about strategies that can accelerate investment returns without burdening clients with excessive debt. One approach that has become increasingly accessible in Australia is internal gearing. Below I explain what internally geared funds are, how they work and why they can be a useful tool for tech professionals seeking to build wealth efficiently. As usual, I support my take on them through academic research and analysis done by very reliable and trustworthy academics.  

What Are Internally Geared Funds? 

Internally geared funds are managed investments often structured as exchange‑traded funds (ETFs) that borrow money within the fund itself. Instead of an investor taking out a personal loan or margin loan, the fund combines the investor’s capital with borrowed funds to purchase a larger portfolio of assets. Because the borrowing happens inside the fund, there is no recourse to the investor beyond their initial investment. In other words, investors won’t face margin calls or be asked to provide additional security if markets fall. Moreover, it doesn’t impact their borrowing capacity.

How Do They Work? 

Each internally geared fund maintains a target loan‑to‑value ratio (LVR), sometimes called a gearing ratio. For example, some funds may borrow to keep their gearing around 50–65 % of the fund’s total assets. If markets rise and the LVR falls below the target, the fund manager will borrow more to buy additional investments. When markets fall and the LVR rises, the manager will repay debt or sell assets to return to the target range. This dynamic rebalancing ensures that the fund maintains its intended level of leverage without requiring investors to act. 

Some geared funds achieve leverage through derivatives such as futures contracts rather than through traditional borrowing. In these cases, the fund uses derivatives to provide magnified exposure often two to three times the movement of the underlying index without needing to raise debt directly. However, because the leverage is tied to daily movements, returns can drift away from the target multiple over longer periods due to compounding and rebalancing effects. 

Why Consider Internally Geared Funds? 

As someone who works closely with tech professionals in companies like Atlassian and Microsoft and AWS etc, I see several advantages to using internally geared funds as part of a comprehensive strategy, especially when considering RSU vesting events and diversification: 

1. Simple access to leverage: Internally geared funds trade like any other ETF. You don’t need to fill out loan paperwork or undergo a credit check; you can buy units through a brokerage account and immediately gain leveraged exposure to an index or asset class. 

2. No margin calls: Because the fund is responsible for the debt, investors aren’t personally liable if markets decline. Your maximum loss is limited to the amount invested, which provides peace of mind compared with traditional margin loans. 

3. Institutional borrowing rates: These funds borrow at wholesale rates that are typically lower than what an individual investor can obtain. Lower financing costs can help improve net returns when markets are rising. 

4. Diversification: Geared funds exist for Australian and global equities, bonds, currencies and even commodities. Instead of borrowing to buy a handful of stocks, you can gain leveraged exposure to a diversified portfolio in a single trade. 

5. Superannuation eligibility: Many internally geared ETFs are permitted investments for self‑managed superannuation funds (SMSFs). This provides a gearing option for clients who want to amplify returns within their retirement savings without violating superannuation borrowing rules. 

Evidence from Academic Research 

Academic literature examines leveraged funds (also called leveraged exchangetraded funds, LETFs) because they incorporate the same internal gearing mechanism. A 2020 study by Trainor, Chhachhi and Brown analysed portfolios using 2x and 3x leveraged ETFs. They found that a portfolio of 2× or 3× ETFs targeting unit exposure can outperform a traditional unleveraged portfolio if the return on the freedup capital exceeds the implied financing costs. The authors observed that more than 90 % of this outperformance is explained by the differential between borrowing and lending rates. However, the strategy requires frequent rebalancing to maintain leverage; portfolios must be rebalanced quarterly for 2× funds and monthly for 3× funds. 

The study also notes that the realised leverage of LETFs tends to decline over time due to volatility and rebalancing. In a low interestrate environment, the authors found that 2× and 3× LETF portfolios outperformed standard portfolios by 0.9 % and 1.8 % per year, respectively. However, the benefits depend on borrowing costs and the performance of the underlying assets; if returns are insufficient to cover costs, leveraged portfolios underperform. This means that professional advice is crucial to realize the gains.  

A review by the CFA Institute highlights the complexity of leveraged ETFs. The book “Leveraged ExchangeTraded Funds: A Comprehensive Guide to Structure, Pricing, and Performance” explains that leveraged ETFs rebalance daily to maintain a target multiple, leading to compounding effects and return dynamics that differ from simple multiples. High volatility can reduce compound returns, and longterm investors may experience tracking errors relative to the underlying index 

Case Study: The Power of 1% in Your Superannuation 

To illustrate why chasing a slightly higher return can make such a difference, consider a 25‑year‑old tech professional working in Canva with $50,000 already saved in superannuation and earning an annual salary of $100,000. For simplicity, assume their employer contributes 12 % of salary to super each year and they work until retirement at age 65. We compare three superannuation strategies based on long‑term average returns: 

1. Industry balanced fund (8 % per year). Following a typical balanced option yields a final balance of about $2.17 million after 40 years. 

2. High‑growth fund (9 % per year). Switching to a high‑growth option increases the final balance to roughly $2.73 million an extra $560,000 compared with the balanced fund. That one percentage point difference compounds dramatically over four decades. 

3. Leveraged portfolio (10 % per year). Using a more aggressive approach, such as a leveraged or internally geared portfolio, pushes the projected balance to around $3.43 million. That’s $1.26 million more than the balanced fund and $702,000 more than the high‑growth fund. 

   
   

This simple example demonstrates the power of compound interest: small differences in annual returns can snowball into hundreds of thousands or even over a million dollars by retirement. It also shows why strategies aimed at generating an extra 1 % return can be worthwhile, provided the risks are understood and professionally managed with an adviser. 

Risks and Considerations 

Leverage is a double‑edged sword. Internally geared funds magnify both gains and losses. A 10 % decline in the market can translate into a much larger drop in the value of a geared investment. Volatility also reduces the compound return of leveraged funds because they rebalance daily; returns over longer periods may be lower than simply multiplying the index return by the leverage factor. 

Funding costs and management fees must also be considered. Even with lower institutional rates, interest expenses and fund fees reduce net returns. If the underlying investment returns are insufficient to cover these costs, a geared strategy can underperform an ungeared strategy. 

Importantly, these funds are designed for investors with longer investment horizons and higher risk tolerance. Younger tech professionals with growing incomes or surplus cash flow may have the capacity to ride out market fluctuations and benefit from the compounding effect of leverage over time. However, anyone considering a geared strategy should ensure they are comfortable with the heightened volatility and are prepared to hold the investment for several years. 

Comparing Internal Gearing and Margin Loans 

To decide whether an internally geared fund or a margin loan is more appropriate, consider the following differences: 

Aspect	Internally geared funds	Margin loans
Who borrows?	The fund borrows on behalf of its investors. You buy units and are not personally liable for the debt.	You borrow directly, usually using your portfolio or property as security.
Margin calls?	No margin calls. The fund manages the debt and rebalances when needed.	Margin calls can require you to add capital or sell investments if markets fall.
Interest rates	Institutional borrowing rates; often lower than retail loan rates.	Retail margin loan rates are generally higher and may vary with market conditions.
Administration	Purchase and sale of units through a brokerage account; suitable for SMSFs.	Requires loan documentation, credit assessment and ongoing monitoring of your LVR.
Volatility and risk	Gains and losses are magnified; costs reduce net return; no risk of losing more than invested.	Gains and losses are magnified; risk of losing more than invested if forced liquidation occurs.

Practical Guidance for Tech Professionals 

1. Assess your risk tolerance – If you are comfortable with volatility and have a long‑term investment horizon, internal gearing may enhance returns. If market fluctuations make you uneasy, a geared strategy might not be appropriate. 

2. Align with your objectives – Consider whether leveraging fits your broader financial goals. It may be suitable for accelerating retirement savings or boosting investment growth, but not for short‑term objectives like buying a home in a few years. 

3. Understand the fund’s gearing strategy – Read the fund’s product disclosure to learn how leverage is achieved, the target gearing range and how often it rebalances. Different funds use different methods (borrowing versus futures) and levels of leverage. 

4. Account for costs – Evaluate the management fees and borrowing costs relative to the potential return on the underlying assets. Higher costs mean you need stronger investment performance to justify using leverage. 

5. Monitor your investments – Even though you are not subject to margin calls, geared funds require professional active monitoring. Market conditions, interest rates and gearing levels can change, affecting your overall investment plan. 

   
   

Conclusion 

Internally geared funds provide a powerful way for Tech Professionals in Australia to amplify investment exposure without taking on personal debt or margin‑loan risk. For tech professionals in companies like Atlassian or Amazon and looking to build wealth efficiently and reduce taxes, these funds can form a powerful part of a diversified portfolio. However, leverage magnifies both upside and downside, so it is essential to understand the mechanics, weigh the costs and risks, and ensure the strategy aligns with your long‑term objectives with the help of a financial adviser. With thoughtful planning and professional guidance, internal gearing can help accelerate your path toward financial freedom. 

While it’s tempting to chase the highest return, remember that higher returns typically come with higher risk. Always consider your personal circumstances and, if necessary, seek professional advice before making changes to your superannuation strategy. As a seasoned adviser, I help clients weigh these options and tailor strategies that balance growth potential with peace of mind. 

General Advice Warning: “The information in this website and the links has been prepared for general information purposes only and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned in this article consult a professional financial advisor to consider whether it is suitable and appropriate for you and your personal needs and circumstances. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product, together with the Target Market Determination (TMD). 

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— Mo Shouman

P.S. If you're already holding PPUs and wondering whether you're structured correctly, let's talk. The average client we work with unlocks $54,543 per year in additional wealth through smarter tax, super, and investment strategies. Most of that comes from fixing blind spots exactly like this one.