Why popularity of ETFs is surging among SMSFs
Fundamental principles for long-term wealth creation are spearheading the surging popularity of Exchange Traded Funds (ETFs) among self-managed super funds.
The 2015 Self Managed Super Fund Report - published over the past week by Vanguard and specialist researcher Investment Trends -reports that the number of SMSFs holding ETFs rose by 53 per cent over the 12 months to April.
And the three biggest reasons given by SMSFs for their decision to invest in ETFs are to further diversify their portfolios (more than 70 per cent of funds), to access overseas markets and to invest at a low cost.
Appropriately diversifying a portfolio within an investor's long-term, strategic or target asset allocation and keeping investment costs to a minimum are among the most critical principles for seeking sustained investment success. (You may be interested to read more on this in Vanguard's principles for investing success.)
Other key findings in the 2015 Self Managed Super Fund Report relating to ETFs include:
- SMSFs make up 43 per cent of Australia's 191,000 investors in ETFs. Although SMSFs were among the first investors to embrace ETFs in Australia, their popularity is also rapidly growing among non-SMSF investors.
- 56,500 SMSFs intend to make their first ETF investments over the next 12 months.
During the research for the 2015 Self Managed Super Fund Report, SMSF trustees were asked: "What are hardest aspects of running your SMSF?"
The largest percentage of respondents to this question, 32 per cent, name "choosing what to invest in" as by far their biggest challenge in managing their SMSF - markedly up from 12 months earlier.
It is clear that numerous SMSF trustees are turning to ETFs as an answer to the investment challenge of what to invest in and how to diversify. Often this would involve SMSFs adopting a core-satellite strategy.
Under the core-satellite approach, investors hold the core of their portfolios in a diversified range of ETFs and/or traditional index funds and then with much-smaller satellites of favoured actively-managed funds and directly-held shares.
Further, the 2015 Self Managed Super Fund Report highlights once again that SMSFs continue to hold a large portion of their assets in a relatively small number of direct shares and in "excess cash". (Excess cash is defined as cash that would usually be invested elsewhere when investors recognise an opportunities. This cash tends to build up during times of increased market volatility.)
SMSFs hold an average of 18 different direct shares in their portfolios with 52 per cent being bank/financial and resource stocks. It is crucial that SMSF trustees recognise the degree of risk being carried in such portfolios.
Again, ETFs and other managed funds are providing a means for SMSFs with a high exposure to relatively few direct shares and to excess cash to efficiently and easily diversify to spread their risks and opportunities.
* The 2015 Self Managed Super Fund Report is based on a survey of almost 4000 SMSF trustees and 500 financial advisers.
By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
24 July 2015
Latest Newsletters
Hot Issues
- SMSF assets reach record levels amid share market rally
- Many Australians have a fear of running out
- How to get into the retirement comfort zone
- NALE bill passed by parliament
- Compliance focus impacts wind-ups
- LRBA interest rates increase for 2025
- Income-free areas set to increase from 1 July
- Most Spoken Languages in the World
- Middle-to-higher incomes boosting SMSF growth
- Investment and economic outlook, May 2024
- Transitioning into retirement: What you should know
- Plan now to take advantage of stage 3 tax cuts
- Deeming freeze a win for Age Pensioners
- Downsizer contributions can be time critical
- The superannuation changes from 1 July
- The Deadliest pandemics in History
- Winners & Losers
- Budget breakdown – Federal Government Analysis
- Federal Budget 2024
- Getting to a higher level of financial literacy in Australia
- What is the future of advice and how far off is superannuation 2.0?
- Investment and economic outlook, April 2024
- Australia’s debt service ratio ‘extraordinary’: CBA
- Connecting an adviser with your children
- ACCC scam report
- The Shortest-reigning Monarchs in History
- ATO warns trustees about increasing crypto scams
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
Article archive
- April - June 2024
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
July - September 2015 archive
- Avoiding tax consequences with the related-party rules
- Focusing on after-tax returns
- Market Update – 31st August 2015
- The gender gap in retirement
- Why popularity of ETFs is surging among SMSFs
- Clearing up confusion about accessing super.
- Good (investor) behaviour
- Five reasons the RBA will likely cut rates again
- Market Update – 31st July 2015
- What the ATO is keeping an eye on
- Through life and death
- Why astute investors are a little like astute kayakers.
- Your first SMSF portfolio
- Market Update - June 2015
- Money-smart ageing
- A new (financial) year’s resolution for your SMSF
- What’s ahead for US interest rates?
- Super: Looking to June 30 and beyond