Diversification, low rates lure SMSFs to ETFs

SMSFs are using exchange-traded funds (ETF) to address diversification issues in their investment portfolios, which continue to be overweight Australian shares, according to online investment adviser Stockspot.

Stockspot chief executive and founder Chris Brycki told a media briefing in Sydney today that SMSFs are looking at different ways to invest other than in term deposits and remain “gun shy” after the global financial crisis, pointing out ETFs are a good entry point back into the market.

“There are SMSFs that have set up SMSFs to buy property, but then have a big pot of cash sitting there and that pot of cash is either in rolling term deposits or either in short-term cash-like products, but they’re seeing that as they’re rolling their term deposits the rates keep on falling,” Brycki said.

Speaking at the release of the Stockspot “Australian ETF Report 2018”, he said the firm’s SMSF clients comprise those who have decided to outsource the investment selection, management and administration of their portfolios and those who have attempted to manage it themselves but have been unsuccessful.

It also includes those who established SMSFs with the intention of trading stocks, but have decided to delegate it as they found it challenging.

The report showed SMSF trustees are using ETFs due to their low cost, transparency, diversification benefits and ease of access via the Australian Securities Exchange (ASX).
Brycki also noted SMSFs more broadly are overweight cash relative to fixed interest and also hold a considerable amount of property in their portfolio.

“ETFs are giving them a way to give access to different diversifying parts of a portfolio that in the past there was very little way for them to do it, and I think they’re getting a bit of a nudge along because Australian shares are doing so poorly,” he said.

He also said SMSFs are cautious over fixed income due to low yields and quoted the Class Super “March 2018 SMSF Benchmark Report”, which examined the top 20 ETF investment holdings in SMSF portfolios.

The report showed the top holding was in the iShares S&P 500 ETF, while there was only one fixed income holding in the top 20, which was the Vanguard Australian Fixed Interest Index ETF.

“Knowing our SMSF clients I don’t think in the past most of them would have ever explored fixed income. In the past it was quite difficult. You had to get very concentrated exposure if you were buying directly, you go through the ASX, or you go through a few of these firms like fixed securities that are out there selling fixed income,” Brycki said.

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