How to use ETFs in an SMSF

CommSec CommSec

10 May 2019

Taking control of your superannuation by managing your own self-managed super fund (SMSF) can be empowering, but it also comes with risk and responsibility.

Running an SMSF means you can select the fund’s investments, so it’s a good idea to learn some of the ways you can manage risk and volatility.

Exchange traded funds (ETFs) can be used to give your SMSF diversity, access other markets you might not otherwise be able to invest in easily, and provide strategy options. ETFs are investment funds that trade just like shares, with good liquidity and high transparency. Prices and holdings are reported online from various providers on a daily basis.

Index-based ETFs usually aim to track the performance of a specific market or strategy in an efficient and low-cost way. Active ETFs usually charge a higher fee because they have a manager or team making decisions on the underlying portfolio allocation. Importantly, significant growth in ETFs has given SMSFs new opportunities to gain exposure to an array of asset classes across sectors, markets and geographies – without the uncertainty of individual stock picking.

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ETFs can provide diversification

A number of recent studies have found that SMSFs aren’t adequately diversified, and that many SMSFs don’t have a complete understanding of what constitutes a truly diversified portfolio1.

Diversification is more than just owning an investment property and ASX200 shares. Portfolio diversification is also about investing across geographies and sectors based on individual risk tolerance and investment goals. ETFs can be a cost-effective way of diversifying your SMSF portfolio.

Every investment portfolio can benefit from thoughtful asset allocation, but sometimes making a decision on individual stocks or bonds can be difficult. The amount of choice can be overwhelming, and when you’re doing it on your own, you have to do your research.

ETFs can help SMSFs gain diversified exposure through an exchange, such as the ASX. SMSFs can use ETFs to either create entire portfolios, or complement existing investments and portfolios. ETFs also provide SMSFs with the freedom to adjust asset allocation, increase or decrease exposure, and rebalance portfolios quickly and easily. Because ETFs can provide access to global markets, they can help SMSFs diversify across economies, which spreads out your risk if any particular sector or country is underperforming.

ETFs can give SMSFs access to other asset classes, including alternatives

ETFs have a broad spectrum of coverage. They may track markets locally and around the world, and invest across different asset classes including equities, fixed income, small cap shares, commercial property, infrastructure currencies, and commodities.

Traditionally, Australians have been under-invested in fixed income, finding shares the easier option compared with trying to understand yield, price and maturity. But buying corporate bonds is easier now that access is available through ETFs that provide exposure to both global and domestic bond markets.

ETFs also provide access to a wider range of “alternative” investments. Synthetic ETFs can give investors the chance to buy commodities that would be difficult to hold if the physical material had to be stored. For example, you could purchase and store an ounce of gold quite easily, but doing the same with a tonne of iron ore would be more problematic.

An ETF can give you access to bulk commodities including agriculture products, oil, industrial metals and precious metals. It can also manage the currency movements of the Australian dollar against the US dollar in the same investment.

ETFs can provide a simple way to gain exposure to foreign currency, avoiding costs of foreign exchange trading platforms. The purchase and sale of the asset is as simple as trading an individual company share.

Interest earned and dividends paid on the various assets can be returned to the benefit of the ETF.

ETFs can be used for a variety of strategies

ETFs can diversify your SMSF across a variety of investing strategies such as growth, income, or defensive aims.

Some can target shares with regular dividend income (which can be great for SMSF and retiree investors) while others may invest in high-interest bank deposit accounts.

Some ETFs, known as “bear funds”, look to gain from market movements both in Australia and overseas to capitalise on daily volatility and sentiment, with no margin calls on investors. Losses are therefore limited to the initial investment and currency risks are hedged.

For short-term cash management, investors can switch between other investments and use ETFs as a temporary placeholder while deciding on their next particular focus.

When your SMSF has finished accumulating funds and you want it to provide an income stream, rebalancing your SMSF portfolio can be managed more simply if you’re invested in ETFs. This is because of the choice of different strategies available among the different ETF products.
 

Conclusion

According to Betashares2 the total value of exchange trade products on the ASX exceeded $40 billion in 2018 and included over 240 funds. ETFs can provide SMSF investors with an easier path to wider portfolio diversification, and the ability to access a variety of asset classes, markets, and economic sectors with different risk and growth profiles.

Because there are so many ETF options available, it’s often helpful to speak to your advisor about the construction of your portfolio. The CommSec Advisory team can discuss how you might invest using ETFs as part of your SMSF portfolio to achieve your desired strategy.

  1. SMSF Association
  2. Betashares Australian ETF review October 2018

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