ETFs, Investments

ETFs find favour as SMSFs seek global exposure

SMSF, trustees, franking credits, AMP Capital

The ban on franking credit refunds will have an indirect impact on the Australian equities market and SMSF trustee investors.

SMSFs increased their exposure to exchange-traded funds (ETF) by more than 10 per cent in the second half of 2018, using them to lift their exposure to international equities in place of direct share trading, according to new data released by CommSec.

In its latest “SMSF Trading Trends Report”, the online broker revealed the number of SMSF investors with at least one ETF increased by 13 per cent during the second half of 2018, following an increase of 5.8 per cent in the preceding six-month period.

It also noted the value of total trades in ETFs increased by 11.4 per cent in the second half of 2018 and the proportion of holdings in international funds grew from 46.9 per cent to 48.9 per cent.

Commenting on the numbers, it said: “Two SMSF trading trends have become firmly entrenched over the last few years – the continuing popularity of ETFs and listed investment companies (LIC) and the use of ETFs and LICs for diversification in SMSF portfolios,” adding the two vehicles were being used to access international equities, foreign currency, fixed income, property and high-interest cash investments.

CommSec highlighted that previous strong growth in direct international share trading by SMSFs, which saw a 57 per cent increase in the 12 months to June 2018, dropped off in the second half of 2018 with growth in the number of direct international share trades by SMSFs increasing by only 9.7 per cent.

“In contrast, trading in internationally based ETFs jumped by 41 per cent, albeit from a small base,” it said, adding the overwhelming majority of recent international trading activity focused on United States-based companies.

Reasons for the decline in direct international share investments were more attractive options in ASX 20 and ASX 200 stocks, according to CommSec, as well as investors seeking to avoid trade tensions between the US and China and “as a result, many SMSFs appear to have turned to ETFs for exposure without specific stock risk”.

It also noted that while many major banks were no longer offering limited recourse borrowing arrangements to SMSFs, and a possible ban could be introduced following the upcoming federal election, SMSFs were unlikely to move out of property in the short term.

“Even if the proposed ban on lending goes ahead, existing loans will likely be grandfathered and as SMSF lending is generally made under conservative conditions, we do not expect a mass exodus of SMSFs from property,” it said.

“Nonetheless, there are a number of potential impacts, both for the wider market and for individual stocks. For example, will SMSFs move funds earmarked for property from the housing market to the share market – and, if so, will they move to direct shares or ETFs, domestic or international?”

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