SMSF trustees and advisers must consider using United States exchange-traded funds (ETF) for diversification and access to a broader range of sectors, according to a wealth management firm.
During a roundtable discussion on US ETFs today, Charles Schwab Australia managing director John-Paul Drysdale said Australian asset classes offer a narrow suite of sectors for investors to choose from, including commodities, energy and emerging markets.
Drysdale said Australian investors do not have the ability to diversify just by investing in Australian ETFs.
“When we look at the sectors we have in Australia, obviously we don’t have a huge technology sector, including the biotechnology and many of those other sorts of sectors,” he said.
He also said ETF investing allows investors exposure to sectors without requiring them to become experts at picking individual stocks.
Drysdale compared management fees of Australian ETFs and US ETFs, and pointed to lower fees in the US due to more competition and scale, and the larger size of that market.
Using July figures from Morningstar Direct, he said every asset class except Australian equity ETFs were lower in cost.
“How does that impact the individual investor or the individual trustee in an SMSF? If you think about a stock as paying a dividend yet the manager is keeping a portion of that dividend as his fee every year, the return to the actual fund is smaller,” he said.
“The smaller the fee the manager takes out every year, the better the performance.”
The average minimum management fee for Australian equities in Australia is 0.07 per cent across the 44 Australian ETFs on offer compared to 0.49 per cent for one ETF on offer in the US.
But the US minimum prospectus net expense ratio is lower for US ETFs across every other asset class, including Asia ex-Japan equity, emerging markets equity, Europe equity large cap and global fixed income.
For example, while the average fee for global fixed income across two Australian ETFs is 0.2 per cent, it is 0.09 per cent across 20 US ETFs.
There are fewer than 200 ETFs offered by fewer than 20 firms in Australia, while in the US there are over 2000 ETFs offered by nearly 140 firms.
As of July 2018, less than $40 billion was invested in Australian ETFs, while in the US more than $4 trillion is invested in ETFs.
US financial services firm Charles Schwab re-established its presence in Australia last year after acquiring Chicago-based stockbroker optionsXpress.
The firm offers Australian retail investors access to US stocks and ETFs, offshore mutual funds, options and futures, and fixed income, with the firm charging investors US$4.95 to execute a trade.