The SMSF sector will benefit from new exchange-traded funds (ETF) providing a hedge and covering a greater range of sectors, such as fixed interest, as many trustees are becoming familiar with the concept of currency-hedged funds.
“The theme I’m seeing now is that more self-funded retirees want more predictability and once they sort of understand the products that are out there, they like to have the option of a hedged option to support them if they are going offshore in terms of investing to take away a proportion of uncertainty, such as currency,” Selfmanagedsuper.com.au national manager Paul Oliver told selfmanagedsuper.
The company currently used ETFs across its five major portfolio models based on investor risk profiles, Oliver said.
“We use the SPDR S&P World ex Australia (Hedged) ETF in each of those models because we have quite a high allocation to international shares across the models, so it protects against currency fluctuations and dramatic market events,” he said.
“We use the hedged option purely for that because you don’t want to have complete uncertainty and have your return wiped out by [the Australian] dollar rising.
“Previously we were using indexed managed funds to give us the same protection four to five years ago where the big issue was the rising Australian dollar, which was hurting return, but we substituted it when State Street brought out their hedged ETF two years ago.”
However, he said he believed the industry needed more product development.
“The range is still very limited, so trustees aren’t going to openly choose an ETF with a hedge unless they’ve got an adviser talking to them about it and talking them through that strategy,” he said.
“I think we’ll see products that have hedged versions of particular sectors, for instance healthcare or technology-style ETFs that have some currency hedging attached to it, because you’re playing a theme of a market but you want that certainty with the currency hedging.
“Also, fixed interest is another one where clients are increasingly wanting fixed interest exposure and maybe there are better options overseas, but we need to avoid a situation where currency movement means your return is completely annihilated.
“In terms of hedged options, if we had more products in the fixed interest area, it would allow a lot more trustees to access those options and also be more comfortable accessing them.”
The investment decision to use hedged ETFs was currently being driven by the firm’s investment advisers and research committee, he said.
“In our models, we try to mitigate all sorts of risks as most advisers want to and again, because of the high allocation we have to international shares, we feel like we have to have that portion there,” he said.
“What we have done is reduced the hedged component of our portfolios, however, if the Australian dollar does continue to fall, we’ll look to increase the exposure to the hedged ETF as well.”
