ETFs, Investments

Positive market prompts low diversification

Australia will need to experience a fluctuating market and volatility for SMSFs to construct diversified portfolios, despite the current high use of exchange-traded funds (ETF), according to iShares.

IShares Australia head Christian Obrist told a media briefing in Sydney today that these sorts of events will prompt SMSFs to consider diversification, but a strong Australian market, along with the incentive of franking dividends, has meant SMSF members have not had to consider it to a great extent.

“Then you start looking at different exposures and then international equity exposure is the most obvious place to go outside of Australian equities. So I think, you know, it’s still in that phase of really unfolding right now,” Obrist said.

He added persuading SMSFs to invest offshore requires a concerted education effort as investors fear the unknown.

“If you’ve never heard about all these global ETFs and then you’re not familiar – if I buy a US-listed ETF what does that mean for me from a tax perspective?” he said.

“Or if I buy a Hong Kong-listed vehicle, they’re all unknowns and people are afraid of what they don’t know. So it’s a process that takes a lot of education.

“But you start with your home market, you buy ETFs listed on the ASX (Australian Securities Exchange) and companies like Blackrock and Vanguard have started bringing international exposures to the market. We did it 11 years ago. We took US funds and cross-listed them.”

Earlier this year, Blackrock announced it would convert 14 United States-domiciled iShares ETFs into new Australian-domiciled ETFs on the ASX to reduce the administration burden for SMSF trustees and advisers.

Obrist also said education is an ongoing process as products continue to proliferate in the ETF market. It is vital to examine the framework for buying and selling ETFs, and understand what is important for the investor to consider before investing in ETFs, he said.

“So for us education is at the absolute core of everything because, like I said before, what you don’t know, you fear,” he said.

“I also say, what is an ETF? Because I hear about these ETFs, I might think that product over there is an ETF too, but actually no it’s an ETN (exchange-traded note). Nothing to do with an ETF, it just trades on the exchange as well, but it’s issued by an investment bank. So you don’t own the assets.”

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