How you can use Exchange Traded Funds (ETFs) in your SMSF
Commonwealth Bank of Australia
06 March 2017
Exchange traded funds (ETFs) are one simple and flexible tool you can use to give your SMSF diversity, gain access to markets you might not otherwise be able to invest in easily, and help you achieve your investment goals.
What are ETFs?
ETFs are funds that trade on a stock exchange, just like ordinary shares. They combine the investment advantages of a managed fund with the ease and cost-effectiveness of share trading. You can use ETFs for cost-effective, easy access to markets and asset classes you might not otherwise have access to, such as debt, derivatives, currency and commodities. They also have good liquidity and high transparency. Prices and holdings are reported online from various providers on a daily basis.
One ETF transaction can help you to diversify your portfolio, as each unit of an ETF represents a basket of securities that often replicates the performance of a specific index or benchmark.
How to access ETFs
You can buy and sell ETFs on the ASX in the same way as shares. ETFs have an ASX code, which you use to trade and track their value. Trades settle like ordinary shares. As with most asset classes there are risks associated with ETFs including currency and ETF specific risk, liquidity risk and counterparty risk.
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.
By using an ETF, you can diversify your portfolio across shares in Australia and globally and the same applies for fixed income. You also have opportunities to invest in commodities and currencies.
From a $2.2tn pool of retirement assets in Australia, Jon Howie, director at iShares, estimates only 1%-2% of the total is using ETFs, while penetration in the US is around 10% and in Europe it sits at around 5%.
However, ETFs are becoming a core part of a portfolio, he said, with around 135 ETFs to choose from in Australia. “Investors can be active in their investment decisions, and have access across the world,” he says.
ETFs can track global markets to provide diversification across economies, which spreads the risk you need to manage.
There’s no single point of risk, so there’s more balance across the portfolio to give a buffer if any one sector or country is underperforming.
Access to other markets
ETFs have a broad spectrum of coverage, tracking markets locally and around the world, across different asset classes, share sectors, 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 simply through trade on the Australian Securities Exchange with XTBs, but to gain global diversity, an ETF can provide a solution.
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 also 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.
Furthermore, 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. “ETFs combine the diversity of a managed fund with the tradability of a share,” BetaShares managing director Alex Vynokur says.
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 franked 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.
How to access ETFs for your SMSF
You can buy and sell ETFs using a CommSec Share Trading Account.
The CommSec Advisory team can discuss how you might invest using ETFs as part of your SMSF portfolio to achieve your desired strategy.
Learn more about ETFs here.
Things you should know:
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. 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. Before you make a decision about your super, you should compare the costs, fees, risks and benefits of super funds and any investment or tax implications that might arise.
Any ETF examples used in the article are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance.
Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.
The commentary provided from external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. 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 Superannuation Industry (Supervision) Act 1993 with ATO oversight.
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