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Fuelling the SMSF boom with ETFs

This article appeared in the May 2013 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

The Self Managed Super Fund (SMSF) sector maintains its dominant position in the superannuation market. Concurrently new Exchange Traded Funds (ETF) products are being launched to help SMSF investors build diversified portfolios. Vanguard's ROBIN BOWERMAN reports.

Photo of Robin Bowerman By Robin Bowerman, Vanguard

How are SMSFs using ETFs and what are the benefits of these investment products for the SMSF investor?

In the four years to June 30, 2012 the SMSF sector grew by 33 per cent. In dollar terms it is by far the strongest growing super sector, representing 42 per cent of total growth in super assets. In the same period the number of SMSFs has increased by 27 per cent to more than 478,000 funds, according to ATO figures.

Similarly, the ETF market has grown considerably over the past year. A March 2013 ASX monthly update on ETFs said the 91 exchange-traded products listed on ASX had a combined market capitalisation of more than $7 billion, a 30 per cent increase year on year.

People with SMSF funds are arguably the most engaged and self-directed investors in the entire superannuation system, so what is the value they are seeing in ETF investments and how are they using them to achieve their objectives?

(Editor's note: The free, online ASX ETF course is a great way to learn about the features, benefits and risks of ETFs).

More SMSFs are using ETFs

The SMSF Professionals' Association of Australia (SPAA) and Vanguard Australia released a comprehensive report on SMSFs by Rice Warner called Survey of Financial Needs and Concerns of SMSF Members in 2012.  The data showed 43 per cent of trustees either owned ETFs or were considering including them in their portfolio; 20 per cent of respondents were not aware of ETF products and 37 per cent were not interested, predominantly because of perceptions they were too risky, too complex or lacked transparency.

Separate analysis of the ETF market conducted on behalf of Vanguard by TRIA Partners in April 2013 shows differences for SMSF investors who access advice and those who do not; in how much they use these funds.

More international ETFs with more experience

SMSF investors who have a financial adviser, on average hold more ETFs than other retail investors, and those with more than one ETF investment have a higher demand for international equities ETFs. For SMSFs using an adviser there has also been a significant increase in ETF share of funds under management - from 9 per cent in 2010 to 27 per cent in 2012. Perhaps this reflects the growing acceptance of ETFs among advisers and the shift towards more fee-for-service adviser practices.

Focusing on asset allocation within ETF portfolios, the TRIA research found a consistent split among investors who held more than one ETF. Australian equities accounted for almost 75 per cent of an ETF portfolio and the remaining 25 per cent were dominated by international equities, with bonds and alternatives only accounting for nominal amounts on average. The low representation of bonds might be because bonds are relatively new to the ETF mix.

Why are SMSFs increasing their exposure to ETFs?

Trustees who participated in the Rice Warner survey perceived the main benefits of having a SMSF as control over investments (95 per cent) followed by flexible investment choices (74 per cent), better tax treatment (58 per cent) and lower cost (62 per cent). These perceived benefits align very well with the key benefits ETFs can bring to an investment portfolio.

  • Liquidity: as they can be bought and sold on ASX through a broker, just like a share. Although investors may at times see relatively low volumes on their trading screens, the primary liquidity is the underlying shares held in the ETF portfolio, because these funds have the ability to create and redeem ETF units on a daily basis, ensuring the primary underlying depth of liquidity can support the volume of trading of the ETF itself.
  • a range of flexible investment choices. ETF products provide access to a broad range of asset classes, including Australian and international shares, fixed income and property, allowing for broad diversification with ETFs products alone. For example, investing in the two Vanguard ETFs - the Vanguard All World ex US Shares Index ETF and the Vanguard US Shares ETF - would give investor coverage of about 93 per cent of the world sharemarkets at a cost of 0.14 per cent per annum.
  • the opportunity to quickly, easily and cost-effectively rebalance a portfolio to align with target asset allocations.
  • tax efficiencies can be achieved through ETFs because they typically will have a low turnover of underlying holdings, which minimises the capital gains distribution impact over the long term.
  • cost-effective exposure compared to individually purchasing shares individually. Also, ETF fees are also significantly lower than actively managed funds.

Risk

ETFs, like any investment, carry market risk - or the risk that the market or market segment will take a downward turn and not provide the return you expected. Investors should always keep in mind that the higher the potential reward, generally the higher the risk. Investing within the bounds of individual risk tolerance is important and good financial advice can help establish those boundaries.

Using index funds and index ETFs can help to manage the risk that a company in which you purchased shares goes into administration, by diversifying an investment across all companies represented by the index. Diversification across different asset classes and within asset classes also helps investors to manage the peaks and troughs of the equity, property and bond markets.

About the author

Robin Bowerman is head of market strategy and communication at Vanguard, a leading ETF issuer.

From ASX

Exchanged Traded Products has information on the features, benefits and risks of ASX-listed ETFs.


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