Self-Managed Super Funds – investing in ETFs

How does a self-managed super fund work?

All members of a self-managed super fund are appointed as trustees of the fund (whether as individual trustees or as directors of a corporate trustee), responsible for establishing the SMSF investment strategy and complying with all legal and regulatory requirements that apply to SMSFs (including the trust deed), as well as applicable tax laws.

A self-managed super fund can have up to four members, with each member (in their capacity as trustee or director of a corporate trustee) responsible and personally liable for decisions made by the fund. Unlike public industry or retail super funds which are regulated by the Australian Prudential Regulation Authority (APRA), self-managed super funds are regulated by the Australian Tax Office (ATO).

Investing in ETFs within a self-managed super fund

ETFs and other exchange-traded products offer SMSFs a way to gain exposure to a diversified portfolio of shares and other asset classes (including those that may otherwise be hard to access) in a single ASX trade.

ETFs can also be used in a SMSF portfolio in combination with directly-held traditional actively managed funds and individual shares.

SMSF investment strategy considerations

The importance of diversification

ATO figures¹ indicate that the average SMSF portfolio is highly concentrated in domestic investments, especially Australian shares, cash and property. Such a portfolio mix can result in increased exposure to concentration risk and SMSFs potentially failing to meet their investment objectives under changing market conditions.

Building a balanced portfolio has never been more important for SMSF trustees. ETFs offer transparent and flexible access to a variety of asset classes, markets and economic sectors, with different risk and growth profiles. Investing internationally can offer a number of benefits to your SMSF portfolio, including gaining exposure to different drivers of growth and spreading investment risk across markets.

Diversification with international assets

Diversifying into international assets is one strategy to help to lower the investment risk in a self-managed super fund, offering exposure to different markets and attractive opportunities for growth. For example, global markets may perform well at times when the local economy and the Australian market experiences a downturn.

With BetaShares’ international funds, SMSFs can invest via the ASX during local trading hours, rather than to having to directly invest in individual international shares, which typically requires trading on an overseas exchange, using a broker that offers overseas share trading services and paying in foreign currency.

Self-managed super fund trustees could consider an ETF that aims to track a country-specific index, for example, the BetaShares FTSE 100 ETF, which aims to track the price and income performance of the largest 100 companies by market capitalisation traded on the London Stock Exchange. There’s also the option for broad exposure to overseas markets such as the BetaShares Global Quality Leaders ETF (ASX: QLTY) which is a portfolio comprised of 150 global companies, excluding Australia, ranked by highest quality score.

Diversification across asset classes

Allocating a self-managed super fund’s investments across various major asset classes can help to protect your portfolio. Diversifying your SMSF portfolio beyond the most common asset classes such as shares and bonds can help to reduce portfolio risk, so it’s helpful to consider ‘alternative’ asset classes including currencies and commodities.

For example, the BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU) offers exposure to the performance of physical gold bullion, hedged back to the Australian Dollar, and the BetaShares Commodities Basket ETF – Currency Hedged (synthetic)² tracks the performance of an index (before fees and expenses) based on commodity futures that provides exposure to a wide range of commodities, hedged for currency movements in the AUD/USD exchange rate.

Two main phases for SMSFs – accumulation and retirement

It can be helpful to think of superannuation investing in two phases – the pre-retirement phase, when the focus tends to be on accumulation of assets and capital appreciation, and post-retirement, when the focus typically is on income generation and risk mitigation. ETFs and exchange-traded products offer solutions to SMSFs at both these stages.

Pre-retirement phase (accumulation)

In the pre-retirement phase, one of the main goals typically is to increase the investment balance of the SMSF. As retirement approaches, the balance between increasing and preserving capital is often adjusted in favour of capital preservation. ETFs can help in several ways during accumulation.

• Exposure to growth assets – A number of global sectors with the potential for growth are under-represented on the ASX, including technology, healthcare, robotics and cybersecurity.

SMSFs can make allocations to these specific sectors, using funds such as the BetaShares Global Robotics and Artificial Intelligence ETF (ASX: RBTZ), which invests in a portfolio of global companies involved in use of or production of industrial robotics and automation, unmanned vehicles or A.I.

Another example of a tactical global sector allocation is the BetaShares Asia Technology Tigers ETF (ASX: ASIA), which provides exposure to 50 of the largest technology and online retail stocks across Asia (excluding Japan), such as Alibaba, Tencent, Baidu and JD.com.

Currency-hedging options for international investing

When you’re investing in global assets, currency hedging is an important consideration.

BetaShares also offers a range of currency-hedged options for self-managed super funds looking to minimise the impact of exchange fluctuations on investments. For example, the BetaShares Global Quality Leaders ETF – Currency Hedged (ASX: HQLT), is the currency-hedged version of QLTY³.

There’s also the BetaShares NASDAQ 100 ETF – Currency Hedged (ASX: HNDQ), which enables investors to access the 100 largest non-financial companies listed on the NASDAQ, hedged back into Australian Dollars⁴.

• Instant diversification – ETFs enable SMSFs to more easily spread funds across a range of asset classes, sectors and investments to maintain a growth profile, rather than taking the higher-risk approach of picking individual investments. Access to a diversified portfolio of shares can be achieved in a single ASX trade.

For example, the BetaShares A200 ETF (ASX: A200) provides exposure to the largest 200 companies by market capitalisation listed on the ASX for a management cost of 0.07% p.a. (currently the world’s lowest-cost Australian shares ETF)⁵. ETFs also remove the need to choose individual investments such as shares or bonds.

The BetaShares Diversified ETFs are a series of four low-cost, all-in-one investment solutions, designed to simplify portfolio construction and asset allocation decisions even further. Each Diversified ETF provides exposure to a range of asset classes, including shares, property securities, bonds and cash, across Australian and global markets. You can choose a portfolio to suit the risk profile of your SMSF.

You can use a Diversified ETF either for your entire portfolio or as a core allocation.

• Leveraged exposure – Internally geared funds are one of the few ways your SMSF can obtain geared exposure – though it is important to understand that while geared strategies offer the potential for greater profit than ungeared alternatives, they also involve higher risk (including potential for magnified losses).

The BetaShares Geared Australian Equity Fund (hedge fund) (ASX: GEAR) offers geared exposure to the returns of the Australian sharemarket, while the BetaShares Geared U.S. Equity Fund – Currency Hedged (hedge fund) (ASX: GGUS) provides geared exposure to the returns of the U.S. sharemarket, hedged to Australian Dollars.

Post-retirement phase (income)

Post-retirement, an SMSF’s focus is typically on capital preservation and income. ETFs and other exchange-traded products can be of benefit at this stage too.

• Attractive income opportunities – BetaShares has developed a range of income-focused funds for investors looking for increased capital stability with the opportunity for regular income above cash rates.

These funds offer attractive potential for income, including:

– the BetaShares Global Income Leaders ETF (ASX: INCM) – invests in a diversified portfolio of 100 high-yielding global companies, screened for dividend sustainability.

– the BetaShares Legg Mason Real Income Fund (managed fund) (ASX: RINC) – invests in quality Australian companies that hold ‘hard’ physical assets such as A-REITs, utilities and infrastructure securities. These companies are expected to pay high dividends from reliable revenue streams.

Fixed income is an asset class that can be hard to access directly, however ETFs enable SMSF trustees to add these exposures to their portfolio in a simple-to-access and cost-effective manner. Some of BetaShares’ fixed income funds include:

– the BetaShares Australian Investment Grade Corporate Bond ETF (ASX: CRED) – pays monthly income at a rate expected to be higher than term deposits and government bonds

– the BetaShares Australian Government Bond ETF (ASX: AGVT) – provides exposure to a portfolio of high-quality bonds issued by Australian federal and state governments and pays monthly income

– the BetaShares Active Australian Hybrids Fund (managed fund) (ASX: HBRD) – offers attractive, franked income from a portfolio of hybrid securities, actively managed to reduce volatility and risk.

• Lower volatility – Post-retirement, trustees typically aim to reduce the fluctuations in the portfolio value of their SMSF.

There are a number of funds that include volatility reduction as part of their strategy, including the BetaShares Managed Risk series of funds. The BetaShares Managed Risk Australian Share Fund (managed fund) (ASX: AUST) and the BetaShares Managed Risk Global Share Fund (managed fund) (ASX: WRLD) aim to defend against market losses during downturns whilst still providing exposure to the majority of growth and income potential from a portfolio of Australian or international shares.

Benefits of using ETFs and other exchange-traded products in an SMSF

• Simplicity – ETFs and other exchange-traded products are easy to purchase as they’re traded on the ASX like shares, with real-time pricing available during the trading day.

Additionally, ETFs help make diversifying both within an asset class and across asset classes more straightforward, as such decisions can be implemented via just a few trades.

• Transparency – SMSF trustees can understand what their portfolio holds at any time, with portfolio holdings generally available from the fund issuer’s website.

• Cost-effective – SMSFs can potentially lower investment costs by using ETFs, as fees are typically much lower than those for traditional actively managed funds.

• Short-term cash management – ETFs can also be used as short-term holding vehicles while the SMSF is researching other investment options. For example, SMSFs can earn monthly income paid at a rate competitive with ‘at call’ bank deposits and term deposits through the BetaShares Australian High Interest Cash ETF (ASX:AAA).

Designed to provide investors with a means of enhancing the returns on their cash allocation, AAA offers accessibility (subject to usual ASX settlement periods) and investors can buy and sell AAA as they would any share on the ASX, both of which are key benefits of ETFs.

• Simplicity of portfolio rebalance – Rebalancing an SMSF portfolio is relatively simple if an SMSF is invested in ETFs, because of the range of different strategies available across products. Adjusting asset allocation can in many instances be achieved in a few trades.

What can I invest my self-managed super in?

All BetaShares funds are available for investment by a self-managed fund, depending on the investment phase, and goals or objectives of the SMSF. BetaShares funds are Australian-domiciled, which means there is no additional paperwork or administration when purchasing units in any international funds. There is no requirement to complete US W8-BEN forms or risk any estate tax implications, both of which are a possibility when investing in non-Australian domiciled (or ‘cross-listed’) ETFs.

To determine which ETFs would best suit your self-managed super fund strategy, it may be helpful to consider the variety of options here:

• Investing in Technology ETFs
• Investing in International ETFs
• Investing in Australian shares with ETFs
• Portfolio diversification with Diversified ETFs
• Short Funds
• Investing in equity income ETFs
• Investing in a Gold ETF
• Ethical Investing
• Cash & Fixed income ETFs

For more information and for a comparison between BetaShares funds that could be utilised by your SMSF portfolio, read here.