Exchange Traded Funds - Portfolio Study background and rules

The scenario

On 1st January 2008, we set up a mock portfolio with access to $100,000 in cash we will look to invest our cash across 5 alternative asset classes - Australian shares, international shares, listed property, commodities and fixed interest. We will gain exposure to these asset classes through the use of ETFs and ETCs. Access to the fixed interest sector will be through a listed investment company that invests in ASX listed interest rate securities.

In relation to the percentages invested in each of the asset classes we have taken a very broad view of what we assume would represent a diversified portfolio. The percentages we have selected does not  take into account any individuals circumstances or portfolio construction theory.

Asset allocation

Taking a broad view on diversification and portfolio construction we have decided to invested across the 5 asset classes as follows:

Asset Class Australian Shares International Shares Listed Property Commodity Fixed Interest
% Invested 55% 24.5% 5.5% 10% 5%
Amount Invested $55,000 $24,500 $5,500 $10,000 $5,000
ASX Code SFY IOO SLF GOLD AYF
Description SPDR S&P/ASX 50 FUND ishares Global 100 SPDR S&P/ASX 200
A-REIT FUND		 Physical Gold ETC Fixed Income LIC

What type of investors will this strategy suit?

This strategy aims to passovely manage an investment portfolio though its suggested that monitoring on a regular basis be undertaken. Diversification through ETFs and ETCs will suit investors with a longer time frame seeking market return with a steady income stream.

Expected results of the study

Our expectation is that the diversified portfolio will provide market return and provide a steady income stream over the life of the portfolio.

How we run the portfolios

The portfolio will have an initial $100,000 available from 1 January 2008.  On the 2nd of January 2008 we will take the following steps:

  • Purchase units in ETFs/ ETCs and LICs across the 5 asset classes in the amounts listed above
  • As there is no ETF covering fixed interest, the security of AYF which is a fixed income LIC was used
  • The units will be purchased at the closing price on the 2nd of January 2009
  • We will review the portfolio on the 2nd of January 2009. Followed by quarterly review after this period
  • Distributions received will be placed in the bank , for simplicity we assume no interest will be accrued on these amounts.

Brokerage charges

Brokerage on the portfolio will be charged at 1%.

Tax implications

All positions will be held until maturity.  As a result, the portfolio will be eligible for the 12-month capital gains tax concession. Capital gains will be calculated at the end of the study once the portfolio is liquidated.