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SMSF’s and ETF’s – Work Well Together


SMSF's and ETF's - Work Well Together

A Picture of Nick Talley By Nick Talley Oct 08, 2014

There has been significant media coverage recent in relation to the boom of Self Managed Super Fund (SMSF) as they continue to be the largest and fastest-growing segment of the Australian retirement savings pool, with over $500 billion held in the over 500,000 SMSFs, according to November 2013 data from the Australian Taxation Office. Along side the fastest growing retirement segment has been the Exchange Traded Fund (ETF) market which has been the fastest growing investment product in Australia, perpetuate by the explosion of growth in the United States.

The growth in these two sectors has enabled them to ‘feed’ from each other and continue their extraordinary growth. This is illustrated by the BetaShares/Investment Trends ETF Report for 2013 which found that approximately 50 per cent of all retail investors in ETFs are buying these investments via their SMSF. According to Morningstar the reason for the growth of both of these sectors can be explained by the fundamental factors important to complex investors:

  1. taking control of their investments;
  2. reducing the costs of investing;
  3. improving transparency and simplicity in their investments; and
  4. improving the tax outcome of investments.

There are a number of other reasons for the continued growth of SMSF’s including the much publicized explosion in the purchase of residential property. However when you look at the fundamental benefits of both SMSF and ETF’s a number of powerful opportunities exist.

Self Managed Super Funds

The underlying benefit of a Self Managed Super Fund is the ability to control what you are invested in and the ability to control your own investment philosophy. What does this mean in practice? Members can control the investment approach they take, for example they may look to adopt a long-term view in which they may buy and hold investments. If this is the members’ decision, the traditional managed funds investment available may not be able to provide the member(s) with the long terms buy and hold strategy. Morningstar states that traditional actively managed funds will buy and sell shares frequently to try to outperform their “benchmark”. Actively managed funds by definition will therefore usually have high levels of turnover (often up to 80 per cent per annum according to a recent Towers Watson report). For investors a reduction in ‘trades’ in turn limits the number of tax events, lowers trading costs and can also help by allowing franking credits on share dividends to compound over time.

Exchange Traded Funds

The investment fundamental captured above are perfectly aligned with the design of Exchange Traded Funds (ETF’S). ETF’s by definition track an index or provide access to an entire asset class and therefore have significantly lower turn-over than the traditional managed fund. For the index such as the ASX 200 has only had turn-over of approximately 6 per cent per annum which is significantly lower than the standard managed funds. What does this mean for investors? Essentially, passive investments such as ETF’s may lead to a better tax position along with significantly lower management costs and availability to access complex dividend strategies.

As always if you are looking to establish an investment or structure such as an SMSF seek professional advice.