SMSF Use of Sector ETFs Likely to Follow the Success of Broader Passive Investments

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For the first time in Australia, investors can take a view on a particular market sector such as Resources, Financials or Energy. With a sector ETF, investors can simply buy the sector, rather than the individual stocks, and gain an appropriately weighted interest in all the securities within that particular index.

 ‘By investing in a sector ETF, as opposed to an individual security, investors are minimising stock specific risk, yet still receiving all the benefits of investing directly in the underlying securities. Benefits such as any capital appreciation, dividends and any associated franking credits coming directly to them and not being diluted in a managed fund,” said Annmaree Varelas, CEO, Australian Index Investments. 

 Australian Index Investments (Aii), an independent Australian Investment Manager, listed a series of six sector ETFs in early 2010 tracking the following market indices:

  •  Aii S&P/ASX 200 Financials (ASX code: FIN)
  • Aii S&P/ASX 200 Financials x-A-REITs (FIX)
  • Aii S&P/ASX 200 Resources (RSR)
  • Aii S&P/ASX 300 Metals & Mining (MAM)
  • Aii S&P/ASX 200 Energy (ENY)
  • Aii S&P/ASX 200 Industrials (IDD)

 SMSFs

More sophisticated or aspiring investors are starting SMSFs and a lot of ETF growth is coming from SMSF trustees.

 The ATO estimates that around 60% of SMSF assets are invested in direct Australian shares and liquid assets (cash and term deposits). The ATO also estimated that 20% of assets are invested in “managed investments”, 6% of which are listed managed investments including ETFs.

 “Based on similar experiences overseas, Australia is on the cusp of a massive growth curve for ETFs, with the market set to climb from $3b FUM to $25b over the next 7-8 years. Some of the reasons for this include investor desire for low cost, transparent and liquid investment products (thanks to the GFC).

 “Also, there is a clear move away from commissions to fee-for-service and the fact that ETFs are one of the few ways that an SMSF trustee can gear Australian equities within their fund,” said Ms Varelas.

 Costs

ETFs trade like a share, so brokerage will be incurred when a parcel of ETFs is bought and sold. Other than that, the only other cost is an annualised MER of 0.43% for each fund.

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