There are two seemingly-booming financial services markets in Australia at the moment: exchange traded funds (ETFs) and self-managed superannuation funds (SMSFs). Could these two products be a perfect match? CANSTAR recently sat down with Arian Neiron, Managing Director of Market Vectors Australia for his insights and according to Arian, SMSFs have been early adopters of ETF investment in Australia.
“Something that is really interesting with regards to Australia versus the rest of the world is that in the U.S. and Europe, the early adopters of ETF?s have predominantly been the institutions whereas in Australia it?s been very much self-managed superannuation funds,” says Arian. “It makes sense; SMSF Trustees want choice and they want control of their retirement and ETFs empower them to do that.”
Certainly, CANSTAR analysis of the ATO-produced self-managed super fund statistical report finds that the two most enduringly-popular investment holdings for SMSFs are cash and direct shares. ETFs provide trustees with a cost-effective way to diversify the direct share portion of the portfolio.
“When it comes to investment, SMSF trustees have a number of obligations under the Superannuation Industry Supervision Act, some of which are quite onerous,” says Arian. “Designing an investment strategy on behalf of the beneficiaries of the fund is instrumental, and ETF?s are an optimal tool for that because they satisfy the core diversification rule and the core liquidity rule. It means that whether beneficiaries are in the wealth accumulation phase, transitioning to retirement or already retired, they can create a diversified investment platform that can be easily drawn down.”
Arian points to Market Vector?s Australian Equal Weight ETF, launched in early March 2014, as a good investment platform on which trustees can build. Trading under the ASX code MVW, the ETF gives investors access to around 77 of the most liquid large and mid-cap stocks on the ASX – but uniquely in the Australian market, gives equal weighting to each stock held. That means that each stock held makes up an identical proportion of the overall investment – in other words, with a holding of 77 stocks, the value of each stock held represents 1.3% of the overall investment.
“Our Equal Weight ETF has been purpose built with liquidity in mind,” explains Arian. “The top ten Australian securities form 55% of the S&P/ASX 200 index, so without the equal weight methodology, you get an investment that is not truly diversified across market sectors. With equal weighting, though, investors get the benefits of sector diversification, stock diversification and liquidity.”
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ETFs are considered by ASIC to be complex financial products. Some are more complex and risky than others. For more information on ETFs and risks associated with them, see ASIC’s Moneysmart website at https://www.moneysmart.gov.au/investing/complex-investments/exchange-traded-products