Here, BetaShares’ Adam O’Connor, looks at why, now more than ever, SMSFs investors are embracing ETFs to deliver advantages that align well with many SMSF and retirement planning goals.
What are ETFs and why are they valued by SMSFs?
ETFs or exchange-traded funds are highly flexible investment tools that are traded on the ASX, just like shares. Some ETFs will closely track the performance of a certain index, such as the NASDAQ-100 Index, others are designed to track the price of a particular asset, such as gold or the US dollar.
In contrast to traditional managed funds, which are offered by active fund managers and require the filling out of paperwork should someone wish to invest, ETFs trade on the ASX – and thus can be bought or sold during the trading day once you have established an account with an online trading broker, financial planner or stockbroker.
According to the latest BetaShares/Investment Trends ETF Report, ETFs continue to grow in popularity in Australia, with an 18 per cent increase in the number of investors, to 315,000 in the last 12 months to September 2017. Over 30 per cent of those current ETF investors do so via their SMSF, and over 55 per cent of all ETF investors are intending to reinvest in the next 12 months.
The total value of the ETF industry has leapt to an all-time high of $37.9 billion (as at 30 April 2018), up from $25 billion in 2016. Both investment volume and the variety of ETF investment options are expected to continue rising in 2018, with SMSF investors likely to continue to be a key client segment for this industry.
Benefits of ETFs for SMSFs
The unique features and benefits that ETFs provide – from diversification and control to cost effectiveness and access – can make them a great way for SMSFs to reach their investment objectives.
Whether via a financial planner, stockbroker or an online trading account, ETFs are easy to purchase as they are traded on the ASX like shares, with real-time pricing available during the trading day. ETFs help make diversifying both within an asset class and across asset classes straightforward, as such decisions can be made via a few single trades.
Should an SMSF investor seek to, for example, obtain greater exposure to international shares in order to diversify away from Australian stocks, ETFs permit such an allocation to be made instantaneously.
With ETFs it’s easy for SMSF trustees to understand what their portfolio holds at any time. The portfolio holdings can be found on the ETF providers website with pricing information updated throughout the trading day.
ETF fees are typically much lower than those for traditional actively managed funds, which can help SMSFs lower investment costs. In addition, they offer a much cheaper way to invest in a portfolio of shares compared with making individual trades.
Diversification – with no additional paperwork!
By investing in ETFs, an SMSF could invest in otherwise hard-to-access exposures. For example, you might be able to capture an entire index of shares, or fixed income securities.
Global shares, that might be difficult to access otherwise, are easily available via an ETF. You can also invest in exchange-traded products that focus on specific asset classes, sectors, currencies and/or commodities.
An example of a strategy that can be otherwise difficult or expensive to access and is available in an exchange-traded form is the BetaShares Yield Maximiser Fund (managed fund) (ASX code: YMAX), which aims to provide higher income from a portfolio of blue-chip ASX shares through the use of an in-built income maximisation strategy.
BetaShares also offers a number of international exposures that are hedged to Australian dollars, which reduces the currency risk across an investment portfolio.
As the objectives of your SMSF changes, ETFs continue to make it simple to adjust the asset allocation to match changing risk preferences. For example, you can focus on fixed income ETFs or higher yielding products with franking credits to help lower risk or boost retirement income.
Most ETFs are designed to track an index or provide investors access to a certain asset class, so the turnover tends to be much lower than for traditional actively managed funds. The high levels of turnover associated with these funds can act as an after-tax performance drag, in contrast to the lower turnover and lower number of tax events for ETFs. Additionally, certain products specifically aim to provide attractive after-tax results via a specific focus on franking credits.
Cost minimisation and short-term cash management
By investing in ETFs, SMSF trustees could achieve higher cost efficiencies and, in turn, overall investment returns.
Since ETFs tend to be much more cost effective than traditional actively managed funds, investors can save a significant amount of money over the total investment period. ETFs can also be used as shorter term holding vehicles while the SMSF is researching other investment options, allowing such investors to minimise ‘cash drag’ that would otherwise occur should an investor instead put such funds into cash.
To show just how far we’ve come in this regard, BetaShares recently announced the launch of the lowest cost ETF available in the world for Australian shares, A200, which provides access to the largest 200 companies listed on the ASX for the ultra-low cost of 0.07 per cent p.a. – that’s just $7 a year for every $10,000 invested!
With more choice of investing options, such as international, fixed-income and high-yield ETFs, the SMSF owner has greater control over how they implement their retirement planning and wealth-building strategies.
Choosing to invest in ETFs
ETFs potentially offer SMSF investors simplicity, transparency, lower fees and diversification benefits. Greater control, more options and tax advantages are other potential advantages. Collect the right information and insight, and you may be able to improve on your plan for a comfortable retirement and potentially achieve your wealth goals with ETFs.
Adam O'Connor is manager, distribution at BetaShares.