If you’re utilising a self-managed super fund (SMSF) for your superannuation, then you’ll want to be strategic about the portfolio that makes up that SMSF. After all, it is your retirement fund, and accumulating as much wealth through it as possible is essential.
Many people look to SMSFs in order to give them control over their superannuation. There are approximately 600,000 SMSFs in the country1, but the concerning thing about them is how sub-optimally many of them are managed from a wealth accumulation perspective.
In 2019, the ATO contacted over 17,000 SMSF trustees and their auditors due to concerns around a lack of asset class diversity in the relevant SMSF portfolios2.
Some of this allocation bias is, of course, quite natural. Property, cash, and local shares are seen by many as the “safe” options. In practice, though overweighting to these, or, for that matter, to any asset class adds easily avoidable additional risk into the SMSF portfolio, but many struggle to understand just what they need to do in order to better balance their SMSFs.
This is where ETFs come in.
With a single trade, ETFs give SMSF investors a simple way to gain exposure to a diversified portfolio of shares, otherwise hard to access asset classes, and more.
There was a 55% increase in the total number of SMSF investors using ETFs from August 2019 to August 2020, which equates to an increase from approximately 135,000 to 210,000 SMSF investors3.
We expect that more and more people will start to look to ETFs as a core component of their SMSF portfolio.
In short, there are five key advantages to investing in ETFs as part of an SMSF:
- Instantly add diversification – ETFs give you simple access to a number of otherwise hard to access asset classes such as global shares, bonds, commodities and more, all via the ASX.
- Maximise income – Once a person has retired and is living on their superannuation, they can choose to invest in income-generating exchange traded products, that will help them to continue to sustain their lifestyle. The BetaShares products investors at this life stage may consider include YMAX, QPON and HBRD, for example.
- Reduce portfolio volatility – Some exchange traded products seek to guard against volatility in the market, allowing SMSF owners to be more “hands off” with their investment.
- Lower costs of investing – Over the very long term (as SMSF investments tend to be), fees can become a major detractor to the performance of an investment portfolio. ETFs, however, tend to have lower costs involved, and no active management fees, which means more money remains in your SMSF.
Which exchange traded products should my SMSF target?
There are many different exchange traded product options for SMSFs, but if we were to break things down broadly from a retirement planning perspective, there are two stages an investor goes through; the first is focussed on accumulating wealth before retirement, and the other is to provide income post-retirement.
Before you’ve retired
During this stage, you’re earning an income from employment, and that means that you’re not relying on your SMSF to live off. Instead, you’re trying to get as much money into your super fund as possible for the time when you do retire. For this stage, one focus might be to look at products that are more oriented towards capital growth. Some examples are technology focused funds such as NDQ and HACK, as part of a diversified portfolio.
Learn about other ETFs focused on growth suitable for SMSFs.
An internally geared fund can be an effective way of building wealth for those investors who are comfortable with geared investments, and some interesting options are now available on exchange. Internally geared funds, such as BetaShares’ Geared Australian Equity Fund (hedge fund) (ASX: GEAR) and Geared US Equity Fund (hedge fund) (ASX: GGUS) are less complex than organising one of these borrowing arrangements yourself.
The gearing obligations are met by the Fund, and any losses incurred by the investor are limited to the initial capital outlay. The borrowing costs themselves are also significantly cheaper, since the Fund can use its capacity as a wholesale investor to borrow at significantly lower interest rates than a single SMSF could. On top of that, interest costs are met within the fund itself, and the SMSF is not required to manage cash flows for ongoing interest costs.
Essentially, you simply purchase your GEAR or GGUS units on the ASX using your SMSF, as you would any other share. You’ll have the capacity to obtain investment exposure beyond your outlay courtesy of the behaviour of these internally geared funds, and with that comes the potential for magnified returns – both up and down – which makes it a genuine opportunity to build wealth.
An investor using these geared funds needs to be comfortable with the concept of gearing and the higher volatility and potential for greater losses that come from this.
After you’ve retired
Once the focus of your SMSF has shifted to providing your livelihood, income generating funds may well become the preferred investment. There are a number of options that you have here, and BetaShares has a number of funds that have been designed to pay income distributions either monthly or quarterly to investors.
Build a better SMSF portfolio with ETFs
Regardless of whether you’re looking to generate income or accumulate wealth, ETFs provide your SMSF with an opportunity to get investment exposure in a simple and easy way, mitigate risk within the portfolio by diversifying it, while also giving you as the investor a chance to be more “hands off” with the investment. In a volatile market, certain products seek to manage market risks and this can assist in providing much-needed stability for your portfolio, and then, as you transition into retirement, there are products that can provide you with a stable, regular source of income.
3.BetaShares/Investment Trends ETF Report, August 2020. Based on responses provided by 2786 survey participants between May and August 2020