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Best SMSF investment strategies for income and capital growth

These are the 3 most asked for investment strategies from our SMSF clients.

SMSF investors have had a tough few years. The returns on term deposits have been dwindling, making it harder to earn an income from the bank.

Lenders have pulled back on SMSF loans for investment properties – now one less investment class to choose from. Meanwhile the most popular shares owned by SMSFs like Westpac and Telstra have had a forgettable decade, generating negative capital returns.

There has been one shining light for SMSFs which are exchange traded funds (ETFs). These ASX listed funds which track broad market indices rather than pick stocks have ballooned in popularity with SMSFs.

ETFs in Australia have grown from around $12 billion to $50 billion in just 5 years. According to Investment Trends, around half of that growth has come from SMSFs adopting ETFs in their portfolios. Over 120,000 SMSFs own ETFs in their portfolios today and that’s growing each year.

These are the 3 most asked for investment strategies from our SMSF clients and how they can be achieved using ETFs:


  1. Best SMSF investment strategy for income
  2. Best SMSF investment strategy for capital growth
  3. Best SMSF investment strategy for capital protection
  4. Getting your SMSF asset allocation right

Best SMSF investment strategy for income: Australian share ETFs

Like owning shares, Australian share ETFs pay great dividends and pass on franking credits. But because ETFs are better diversified they’re much lower risk than picking a portfolio of stocks.

We recommend the Vanguard Australian Shares ETF (VAS) which currently has a dividend yield of 4.2%. That increases to around 5% once you add in franking credits, a lot higher than the prevailing interest rate!

For SMSFs who want a little more income in their portfolios we recommend the Vanguard Australian Shares High Yield ETF (VHY) which has a tilt towards dividend shares and has a dividend yield of 5.5% and grossed up yield of 7.5%.

This ETF is one of the more popular investment themes we see for SMSFs. It delivered returns of 14.2% over the last financial year thanks to a rebound in financial shares.

SMSF tip:

It may be tempting to focus on yield, particularly as a SMSF in pension stage. We caution our SMSF clients not to be too focused on dividends. When you only focus on boosting income it can come at the expense of growing (and preserving) your capital. 

SMSFs should focus on total return (income + capital growth) rather than just your income or dividend yield. Even if you’re at pension stage you shouldn’t be afraid to draw down from income and from capital growth. Over the last 12 months our Balanced strategy (Turquoise) generated a total return of 11% after costs, this included income of 3.2% and capital growth of 7.8%.

A SMSF in pension stage requiring a minimum withdrawal of 5% could have taken the 3.2% from dividend income, 1.8% from capital returns and still be left with 6% in capital returns for the 2018/09 financial year.


1 year return3 year return (p.a.)5 year return (p.a.)
Vanguard Australian Shares ETF (VAS)11.4%12.8%8.7%
Vanguard Australian Shares High Yield ETF (VHY)13.8%11.1%5.7%

Learn more: Best Australian Share ETFs

Best SMSF investment strategy for capital growth: global and emerging market share ETFs

Australian shares have generated lousy capital growth over the last 10 years. Fortunately SMSFs now have a wonderful array of global focused ETFs to choose from. Global share ETFs can help you to keep earning a decent return even when your Australian shares are performing poorly. 

ETFs give you better sector diversification

The Australian share market is heavily geared towards the financials and materials (mining) sectors. Owning some global share ETFs helps combat over exposure to these sectors as they tend to have more technology and healthcare stocks. This has helped markets like the US, Germany and Japan do much better than Australia since 2010.



We recommend the Global 100 ETF (IOO) which invests in the largest 100 companies in the world like Apple and Google. This ETF generated phenomenal growth of 16.3% p.a. over the last 3 years.

We also recommend an emerging markets ETF (IEM) – even though emerging market shares can be smaller and more volatile, they give you access to faster growing economies and future growth. Emerging markets have returned 12.2% p.a. over the last 3 years.

Get your SMSF portfolio recommendation

Our research shows that over a full market cycle, a 45% allocation to global shares (both top 100 and emerging markets) has been the ‘sweet spot’ – the perfect balance between risk, return and diversification. Stockspot portfolios currently have 30 – 50% allocated to overseas markets – which helps SMSFs capture capital growth opportunities.

SMSF tip:

While you may be tempted to pay an active fund manager to access global markets, we’ve found that low-cost global share ETFs tend to do better over the long run because of their lower fees. This is why we only recommend low cost indexed investments and avoid higher cost active funds.


1 year return3 year return (p.a.)5 year return (p.a.)
iShares S&P Global 100 (IOO)14.6%16.3%13.5%
iShares MSCI Emerging Markets ETF (IEM)6.3%12.2%8.0%

Learn more: Best Global Share ETFs

Best SMSF investment strategy for capital protection: high grade bonds 

Any SMSFs who owned shares during the financial crisis will appreciate the importance of capital preservation. While shares are a great long-term investment, they can also have some stomach churning dips along the way which is why we advise all SMSF clients to own some high grade bonds as insurance.

High grade bonds have historically risen when share markets fall so can provide some insulation when markets become volatile. Over the past 30 years, whenever shares fell, high grade bonds did their job as a portfolio cushion and increased.

Australian bonds were one of the few asset classes with a positive return in 2018 when share markets fell, as they also did in 2008.

Bonds vs australian shares return comparison

It has been difficult for everyday investors to access high grade bonds due to high minimum investment amounts, lack of diversification and costs. However, with the rise of ETFs, investors can now access bonds and make them a part of their portfolios.

We recommend the iShares Core Composite Bond ETF (IAF) which gives SMSFs exposure to around 500 high quality government, semi government and corporate bonds. This ETF has a yield of 2.3% and it generated a total return of 9.6% over the 12 months to 30 June 2019.

As interest rates fall, bond prices rise in value because their fixed coupon payments become more valuable. This is what makes bonds a much better cushion for falling share markets than cash or term deposits.

For SMSF clients who want also want some global bonds we advise the Vanguard International Fixed Interest ETF (VIF) which has a yield of 2.0% (a bit lower than Australian bonds) and 12 month returns of 6.9%. This ETF gives you access to bonds issued by the US, Japanese, French and UK governments as well as some other countries.


1 year return3 year return (p.a.)5 year return (p.a.)
iShares Core Composite Bond ETF (IAF)9.6%4.1%4.9%
Vanguard International Fixed Interest ETF (VIF)6.9%2.5%

Learn more: Best Australian Bond ETFs

Getting your SMSF asset allocation right

Rather than focus on a single strategy (income, growth or capital preservation), we recommend SMSF clients diversify across a range of ETFs to get exposure to all three. The right mix of ETFs should be based on the SMSF members’ investment horizon, lifestage, risk capacity and cashflow needs.

Getting your SMSF asset allocation right will help your portfolio deliver more consistent performance whether share markets rise or fall. Stockspot offers a free assessment and will suggest the right investment mix of low-cost ETFs for your SMSF.

Get your SMSF portfolio recommendation

The strategies we recommend have experienced much lower volatility (risk) than only owning Australian shares and have had consistent returns over 1, 3 and 5 years.


1 year return3 year return (p.a.)5 year return (p.a.)
Topaz (aggressive growth)11.4%11.5%9.2%
Emerald (growth)11.2%9.8%8.2%
Turquoise (balanced)11.0%8.8%7.7%
Sapphire (moderately conservative)10.8%8.2%7.3%
Amethyst (conservative)10.5%7.2%6.8%

Once your portfolio is set up, SMSFs should put into place threshold based rebalancing to make sure that the investments don’t move too far away from their target weights.

This keeps your portfolio nicely balanced over time and takes the emotion out of your investment decisions. We do this automatically so SMSF clients don’t need to watch their portfolio day to day and can get on with their lives.

Finally, a big benefit of ETFs is that they can help simplify your SMSF audit and tax. You can get your SMSF tax as automated as possible to keep costs low and make sure more returns are leftover for you.

If you pay more than $2,000 per year for SMSF admin there are ways you can reduce your costs. Stockspot recently launched a new service for SMSF admin, audit and tax starting at $660 per year.

Find out how Stockspot makes it easy to grow your wealth and invest in your future.


Founder and CEO

Chris has been vocal in calling out the industry 'Fat Cats' and is known for telling it as it is. He sits on two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS. He holds a Bachelor of Commerce (Accounting/Finance Co-op Scholarship) from UNSW.

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