Australian-owned sector ETF provider, Australian Index Investments (Aii), believes that with the growth in energy costs worldwide that it might be time for investors to tilt their portfolios towards this growth sector. With a basic underlying energy shortage, rising global demand and revolution in the Middle East, triple digit oil prices are very possible.

“With oil prices on the rise maybe now is the time to consider a higher energy stock exposure for portfolios. An easy and cheap way to implement an energy strategy is via the Aii Energy ETF, which is listed on the ASX.

“The Aii Energy ETF contains oil majors such as Woodside Petroleum, Origin Energy, Santos and Oil Search.  The basket of energy stocks in the sector is currently 22. Interestingly, the sector ETF does not just include oil producers but also offers exposure to explorers and service companies supplying the energy industry,” said Annmaree Varelas, CEO, Australian Index Investments.

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“We are seeing increased interest from SMSFs, particularly in our two resources ETFs (ASX Codes: MAM and RSR).  SMSF trustees seem to be using our sector resource ETFs to bolster their existing share portfolios,” said Michelle Morgan, Marketing Manager at Aii.

Aii found that the average trade by an SMSF was around $25,000 to invest in its ETFs.

“Quite often SMSF portfolios hold major mining and banking stocks but when seeking to add a tilt towards mining/resources, trustees are caught in a bind between bulking up their BHP and Rio Holdings or using research to find the next star mining stocks.

“Buying a resource sector ETF allows a greater allocation to the sector without needing to sell down existing stocks or add individual mining stocks. This can be done for the cost of a single share trade on ASX and they have piece of mind knowing that their investment fully replicates the underlying index.

“By holding a basket of resource stocks via a resource ETF means that investors naturally increase their exposure to the major players but also pick up smaller miners/explorers who can provide capital growth opportunities over time.  SMSFs can achieve this outcome easily and cost-efficiently, without spending large amounts of time on research and stock selection.

“Mining is hot now but what about when other sectors start to shine? Investors can sell down their mining sector ETFs and buy into a Financials or Industrial ETFs as market sentiment turns to these areas.

“We believe that SMSF trustees are using our sector ETFs to not only get an overweight position is a sector but also make new investments without touching their core share portfolios that would trigger CGT events,” said Ms Morgan.

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Sector ETFs buy the sector, rather than the individual stocks, and gain an appropriately weighted interest in all the securities within that particular index.

Australian Index Investments (Aii) is the first to offer sector ETFs in Australia and has six sector ETFs covering the financial, mining, industrial, resources and energy sectors.

ETF investment strategies to suit every type of investor

“Strategy-based ETFs, such as our Sector ETFs, give investors and their advisers more flexibility to work on more opportunistic/active strategies for creating wealth. At Aii, we are seeing increased adviser demand for a broader use of ETF strategies,” said Annmaree Varelas, CEO, Australian Index Investments.

Sector ETFs can be used as a passive buy & hold when taking a medium to long term view on a particular sector with a view to outperforming the broader market.

Alternatively, advisers could look to implement a core/satellite portfolio (with sector ETFs as the satellite investments) with the aim to generate additional alpha within your existing portfolio.

Sector ETFs can also work well as a passive product that is actively managed within a portfolio by implementing a sector rotation strategy.  This allows an investor to have several strategies in play at once:

•    Buy a sector on its upswing, thus capturing its potential for capital growth upside
•    Sell a sector on the start of a downswing to take profits and reinvest those profits in another sector that is on an upswing
•    Alternatively, you could keep a portion of the investment in the sector that is tracking down to maintain some defensive exposure

Costs

With a sector ETF, the only costs are initial brokerage and an MER of 0.43% p.a. with a tax statement provided at the end of the financial year.

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 ‘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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