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How to use ETFs in an SMSF

How to use ETFs in an SMSF

Exchange traded funds can give your SMSF diversity across asset classes, local and global markets, sectors and strategies.

Taking control of your superannuation by managing your own SMSF can be empowering, but comes with risk and responsibility.

With an SMSF, you can select the fund’s investments, so it can be wise to know there are ways you can manage risk and volatility.

Exchange traded funds (ETFs) are one tool you can use to give your SMSF diversity, access to other markets you might not otherwise be able to invest in easily, and provide strategy options. ETFs are investment funds that trade just like shares, with good liquidity and high transparency. Prices and holdings are reported online from various providers on a daily basis.

Index based ETFs usually aim to track the performance of a specific market or strategy in an efficient and low-cost way. Active ETFs have a manager or team making decisions on the underlying portfolio allocation and usually charge a higher fee. Importantly, significant growth in ETFs has given SMSFs new opportunities to gain exposure to an array of asset classes across sectors, markets and geographies – without the uncertainty of individual stock picking.

Diversification

A number of recent studies have found that SMSFs are not overly diversified. In addition many SMSFs do not have a complete understanding of what constitutes a truly diversified portfolio1.

Diversification is more than just owning an investment property and ASX200 shares. Portfolio diversification is also about investing across geographies and sectors based on individual risk tolerance and investment goals, and ETFs can be a cost-effective way of diversifying your SMSF portfolio.

Every investment portfolio can benefit from thoughtful asset allocation, but sometimes making a decision regarding individual stocks or bonds can be difficult. The amount of choice can be overwhelming and when you are doing it on your own, you have to do your research.

ETFs can enable SMSFs to gain diversified exposure through an exchange, such as the ASX, and create entire portfolios or complement existing investments and portfolios. ETFs also provide SMSFs with the freedom to adjust asset allocation, increase or decrease exposure and rebalance portfolios quickly and easily. Because ETFs can access global markets you can obtain diversification across economies, which spreads the risk you need to manage if any one sector or country is underperforming.

Access to other asset classes including alternatives

ETFs have a broad spectrum of coverage, tracking markets locally and around the world, across different asset classes including equities, fixed income, small cap shares, commercial property, infrastructure currencies and commodities.

Traditionally, Australians have been under-invested in fixed income, finding shares the easier option compared with trying to understand yield, price and maturity. Buying corporate bonds is easier now that access is available through ETFs trading on the Australian Securities Exchange with access to both global and domestic bond markets being available.

ETFs also provide access to a wider range of ‘alternative’ investments.

So called synthetic ETFs give investors the chance to buy commodities that would be difficult to hold if the physical material had to be stored.

While you could purchase and store an ounce of gold quite easily, doing the same with a tonne of iron ore would be more problematic.

An ETF can give you access to bulk commodities including agriculture products, oil, industrial metals and precious metals and can manage the currency movements of the Australian dollar against the US dollar in the same investment.

ETFs can provide a simple way to gain exposure to foreign currency, avoiding costs of foreign exchange trading platforms and the purchase and sale of the asset is as simple as trading an individual company share.

Interest earned and dividends paid on the various assets can be returned to the benefit of the ETF.

Variety of strategies

ETFs can diversify your SMSF across a variety of investing strategies such as growth, income or defensive aims.

Some can target shares with regular dividend income, to specifically address the needs of SMSF and retiree investors, while others invest in high-interest bank deposit accounts.

So-called ‘bear funds’ look to gain from market movements both in Australia and overseas to capitalise on daily volatility and sentiment, with no margin calls on investors. Losses are therefore limited to the initial investment and currency risks are hedged.

Tax administration costs of overseas earnings can be reduced with the use of ETFs and costs and fees can be less than those for managed funds.

For short-term cash management, investors can switch between other investments and use ETFs as a temporary placeholder while deciding any next particular focus.

When your SMSF needs to move from accumulation of funds to providing an income stream, rebalancing your SMSF portfolio can be managed more simply if you are invested in ETFs because of the choice of different strategies available among the different ETF products.

Conclusion

According to Betashares2 the total value of exchange trade products exceeded $40 billion and comprised over 240 funds. Our recent research on SMSF trading trends shows that not only have SMSFs been leading the move into ETFs in general, but SMSFs have also been actively using ETFs to obtain international exposure with over 50% of SMSF ETF trading being international funds. In addition they have been actively managing that exposure between various markets and using ETFs to access other asset classes.

ETFs provide SMSF investors with an easier and transparent path to wider portfolio diversification and the ability to access a variety of asset classes, markets and economic sectors with different risk and growth profiles.

Due to the many options available, it is often helpful to speak to your advisor around the construction of your portfolio. The CommSec Advisory team can discuss how you might invest using ETFs as part of your SMSF portfolio to achieve your desired strategy.

 

1 SMSF Association
2 Betashares Australian ETF review October 2018 

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law. CommSec Advisory is the advisory arm of Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec), a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group & Chi-X Australia. . While potential SMSF investments have been illustrated within this content they do not represent a comprehensive suite of possible investment products and services within the guidelines pursuant to the SIS Act 1993 with ATO oversight.