When we launched the first exchange-traded fund (ETF) on Australian shores nearly 16 years ago, we targeted a local industry that was mostly institutional investors. Since then, we have watched the appeal of ETFs grow and grow.
In fact, as of 31 March 2017, there were 203 exchange-traded products (ETP) trading on the Australian Securities Exchange (ASX) , representing over $27.4 billion in funds under management (FUM), according to the ASX Monthly Funds Report for March.
Not bad when you consider ETPs only broke through the $20 billion in FUM mark in 2015.
But one of the most fascinating aspects of our time in Australia has been the change in the ETF investor base. Once dominated by institutional investors and financial advisers, the base has broadened and expanded to include a significant number of individual investors.
SMSF investors, or so-called do it-yourself superannuation fund investors, are part of this trend.
According to the Investment Trends “2016 Exchange Traded Funds Summary Report”, there are now an estimated 265,000 ETF investors in Australia who have recognised ETFs are an easy-to-use, transparent investment tool that gives them diversified exposure to some of the largest companies in the country – and the world – in a single trade.
With such a huge (and growing) number of investors looking to ETFs, its useful to stop and take stock of why so many Australian’s are turning to ETFs to manage their own retirement assets.
Why choose an ETF?
ETFs are flexible trading and investment vehicles that can be used to help SMSF investors achieve a number of important investment goals. There are several key factors behind the popularity of ETFs in Australia:
• ETFs are transparent. Their holdings are available daily, allowing ETF investors to look under the hood and see exactly what they are investing in. Such transparency allows for more informed investment decisions and allows investors to shape their portfolios with great accuracy.
• ETFs are low cost. Due to lower overheads, staffing costs and turnover, ETFs typically have lower costs than comparable managed investment schemes.
• ETFs are easy to use. They are investment funds that trade just like stocks and are referenced via a ticker on an exchange, such as the ASX. You can buy or sell ETFs whenever the exchange is open for business.
• ETFs offer instant diversification. For example, our first ETF in Australia, the SPDR S&P/ASX 200 Fund, offers access to the top 200 largest Australian stocks by market cap in a single trade.
So what’s in it for SMSF investors?
SMSFs account for 30 per cent of all superannuation assets in Australia, with over $653.8 billion in assets, according to Australian Prudential Regulation Authority statistics. This is a truly staggering figure, especially when you note the rapid pace at which SMSFs continue to grow.
The most recent ATO report, “SMSF: A Statistical Overview 2014-15”, indicated that in 2015 the typical SMSF had only one or two members. Yet the average assets reached $1.1 million. With such large average account balances, SMSF investors are typically more engaged with their superannuation and have a keen eye for cost control.
So, it goes without saying that the prospect of lower fees and greater control are important drawcards for investors who decide to start their own SMSFs. ETFs look especially attractive for SMSF investors, given they are easy to use, affordable and offer instant diversification.
Many SMSF investors turn to ETFs to form the passively managed core of their investment portfolio.
They are also realising the role ETFs play in allowing direct access to investment opportunities they wouldn’t otherwise have. Even though they might be listed on the ASX, ETFs can provide access to a range of asset classes well beyond just Australian equities.
One such asset class is international equities. ATO research has shown many Australian SMSF investors are underweight international investments. Yet international equities can offer new growth opportunities and can improve portfolio diversification.
International equities offer exposure to sectors that are poorly represented in Australia, or in some cases entirely absent, such as pharmaceuticals and information technology.
The opportunity to access and benefit from fast-growing sectors beyond our borders should be too good to turn down for Australian investors looking to diversify their retirement savings.
Many SMSF investors are also discovering what institutional investors have known for some time – that asset allocation, not security selection, is the key to long-term investment results.
While factors such as cost and access have traditionally made it difficult for SMSF investors to achieve a flexible and diversified asset allocation, ETFs allow investors to gain broad-based exposure to Australian or international stock markets, real estate or fixed income through affordable products that are exchange traded. Asset allocations can be implemented or changed quickly and easily using ETFs.
ETF use among SMSF investors has taken off in recent years. Many individual investors planning their retirement have realised the immense value proposition of a transparent, low-cost and easy-to-access tool that allows instant diversification through a single investment. And it is through these core factors that their use among SMSF investors should only continue to grow.
As always, investors should read and consider the relevant product disclosure statement (PDS) for an ETF carefully before making an investment decision. Copies of SPDR ETF PDSs are available at www.spdrs.com.au. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. Diversification does not ensure a profit or guarantee against loss. Frequent trading of ETFs could significantly increase commissions and other costs, such that they may offset any savings from low fees or costs.