At Citi, we saw investors trade these themes via warrants. Warrants typically involve leverage and borrowing, and investors must meet suitability requirements to trade them. 

Investors can potentially use warrants to generate income, achieve leverage without margin calls or credit assessments, and as a tool for portfolio hedging, usually through MINI shorts.
 

How warrants work

Warrants have been available in Australia for almost 30 years and are traded on the ASX via a broker like other listed instruments such as shares and exchange traded funds (ETFs). They will sit alongside these investments in your account. 

You can learn more about the features, benefits and risks of warrants on the ASX website. 

When considering if warrants are right for you, Citi suggests investors reflect on their objectives, risk tolerance and time frame along with other factors. It is also important to read the Product Disclosure Statement to understand the terms of warrant
 

Three warrants strategies for 2025:

1. Potentially maximizing yield via warrants

During the term of the investment, an instalment holder is entitled to receive all of the dividends, and, depending on investor status, any available franking credits paid in relation to the underlying shares. These dividends are paid to the investor. 

As investors only pay a fraction of the cost of the underlying share upfront, the yield of an instalment may be higher than that of the underlying share. 

Take the example of BHP Group (ASX: BHP). BHP paid around $2.19 in dividends fully franked in 2024. Investors can outlay around $40 [1] to buy a BHP share, to receive the $2.19 in dividends and franking credits. 

Alternatively, they might purchase a BHP instalment warrant by paying an initial instalment (e.g. $20 + interest costs) and paying the remaining part later ($20 final instalment). 

As the holder of the BHP instalment warrant (and beneficial owner of the underlying shares which sit in trust) they would have been entitled to the full $2.19 dividends and fully franked dividends, the same as an ordinary BHP shareholder, as well as any share price movement in BHP both up and down over the same period. 

As the BHP instalment warrant is leveraged, the investor’s returns are magnified – both potential gains and losses.
 

2. Using instalment warrants to buy ETFs

Growing in popularity amongst Australian investors has been the use of ETFs and using instalment warrants to buy ETFs with the ‘buy now pay part later’ approach. 

Citi has more than 200 instalment warrants over ETFs and listed investment companies (LICs). Using the instalment warrant structure is a form of borrowing that incurs an interest expense, therefore the instalment warrant holder will receive a tax statement at the end of the financial year detailing the interest costs that have been paid which may be tax deductible, and any dividends, distribution and franking credits received. 

As the instalment warrant holder is the borrower, if circumstances change, they can pay off the final payment (loan) anytime through the life of the product and receive the underlying shares or ETFs without triggering a capital gains tax (CGT) event - if they decide a borrowing strategy is no longer suitable for them.

As in the previous example, instalment warrants over ETFs are leveraged, meaning potential gains or losses are magnified.
 

3. Hedging via MINI shorts

Over the long term, investors buy assets where they have a view the asset price will appreciate. However over certain, typically shorter, periods an investor may have a view that the asset price could go down, either because they anticipate some bad news on a company or a more general macro view such as elections or geopolitical tensions.

Rather than selling that asset in the short term, an investor may implement a hedging strategy by ‘shorting’ the security or asset over the period, speculating on a decline in value of the security or asset. Short sellers, if correct, hope to use the profit from their short position to help offset the loss in the security they are holding, if used as a hedging tool.

Through the MINI shorts, investors may simply short a specific stock or, if anticipating a broader more general market fall, use Index MINIs such ASX 200 Futures MINI shorts.

In Citi’s view, shorting can be a high-risk strategy. The biggest risk of a short position is a price surge in the shorted stock or index because, in theory, there is no upper limit on how high a stock or index price can rise. Investors need to consider the suitability of this strategy, their time frame, costs and how much potential loss they are willing to take on.
 

Conclusion

Before they use warrants, investors must be mindful that there is the potential to lose all their initial capital and outlay. 

Potential investors might reach an investment decision to use warrants only after carefully considering, with their advisor, the suitability of using warrants, taking in to account the risk factors relating to warrants that are detailed in full in the product disclosure statements.

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[1] At time of writing in November 2024