Australian SMSF trustees finally discovered global shares in 2013 and appeared to seize on exchange traded funds (ETFs) as an efficient, economical way of investing in overseas equities.
The rush offshore helped produce a 54% rise in total ETF assets to $10 billion in the year, with forecasts – by Morningstar and the major ETF providers – that assets invested in these products can continue rising this year. The much larger managed funds market had to be content with a slower percentage rise (although the dollar amounts flowing into managed funds still dwarf ETFs, the relative newcomer).
The flavour of the year
In the space of a year, half the annual dollar inflow (or more than $1.2 billion) was channeled into global ETFs, to bring overseas equity ETF assets to $3.2 billion, against $3.7 billion in local equities.
Self-directed investors, including SMSFs, are now locking onto low cost ETFs. While active managed funds via a planner or platform still cost 1% to 2%, the four largest ETFs charge between 0.07% and 0.29%. And, as ETFs continue to amass more funds, those costs could fall further. The iShares S&P 500 index funds (IVV) charges only 0.07% thanks to being cross-listed to the US fund with more than $US50 billion of assets.
The biggest local ETF at the end of 2013 by far was still the broad-based State Street ETF, SPDR (STW) based on the local S&P/ASX 200 index with $2.2 billion of assets. The Blackrock iShares IVV was in second place with $1 billion of assets, the iShares global 100 (IOO) with $0.54 billion was in third place with the Vanguard Australian shares ETF (VAS) fourth with $0.52 billion of assets.
While broad-based local and overseas equity ETFs dominate the top listings, providers are still adding to their range. There are now more than 90 ETFs on offer. And the industry is confident of further strong growth: Morningstar says BetaShares is tipping growth of the current $10 billion to $13 to $15 billion this year, while SPDR is predicting assets could reach $13 billion.
A tailored approach
The Morningstar annual data shows that investors are using ETFs for specialised sector investments, as well as a way of getting broad sector coverage. The Physical Gold ETF (GOLD) is still the fifth largest local fund with $442 million of assets, although the total funds flow for 2013 shows a significant asset outflow from all commodity ETFs in the year.
ETFs also now offer targeted sectors, such as emerging markets and specific global sectors, such as health care and consumer staples. In addition, there is demand for ETFs offering high yield: Vanguard’s Australian share high yield fund (VHY), BetaShares high interest cash ETF (AAA) and Russell’s High Dividend ETF (RDV) are all in the top dozen funds by asset size.
Compared with a few years ago, when it was estimated that about 20% of ETF assets were held by SMSFs, the percentage may have risen to more than 33% of ETF assets in 2013, according to estimates by various providers.
While some investors argue that more volatile markets might mean actively managed funds might be a better bet than index-tracking ETFs, it is becoming clear that investors are using ETFs both to get their “core” exposure to markets as well as getting specific investment in “satellite” sectors.
Low-fee ETFs have been slow to grow in an Australian market where the market traditionally has been adviser driven. Estimates vary, but recent surveys suggest between one-half to two-thirds of SMSFs don’t have a specialist financial adviser. This may lead to a new era in investments, as the booming SMSFs have proved to be early adopters of ETFs and changes to FOFA regulations emphasise costs.
In uncertain times, neither active nor passive investment approaches offer the complete solution. But, in a period of low overall returns, it always makes sense for SMSF trustees to seek the lowest cost investments.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Peter Switzer: Why it’s still ok to hold banks [1]
- Paul Rickard: Switzer Super Report portfolios slightly outperform index in January [2]
- Brittany Ruppert: Auction numbers are low but clearance rates remain high [3]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [4]
- Penny Pryor: Shortlisted [5]
- James Dunn: How will pub law changes hit shares? [6]