We’ve noticed an increased interest in exchange traded funds (ETFs) among self-managed superannuation funds (SMSFs) lately. Thanks to their simplicity, flexibility and affordability, ETFs are increasingly favoured as a valuable component in the investment mix.
Just like buying individual shares, ETFs are bought and sold on a stock exchange, which means they’re easy to trade. They’re a basket of securities – stocks, commodities, or bonds – which offer a handy way to diversify your investment, helping to spread risk.
If we were to break it down, we could identify three distinct types of SMSF investors who are embracing the potential of ETFs.
SMSF Investor #1: Ex-advised individuals who want more control
The first group is made up of those who were once dependent on advisers but, due to subpar returns and performance, have decided it’s time to take control of their own SMSF portfolio. They believe they have the ability to manage their investments and are willing to invest the time and effort needed.
SMSF Investor #2: Long-term self-managed investors who want to outsource investment management
Then there’s the second group of investors who’ve been self-managing their SMSFs for a significant period. Yet, now they’re seeking a more hands-off approach. Perhaps life has become busier, or they simply want to step back from daily management; either way, they’re looking for more automated solutions.
SMSF Investor #3: Young investors
Finally, the third group consists of younger investors, often couples, dipping their toes into the world of SMSFs for the first time. They’re drawn to the idea of a low-cost, no-fuss strategy that allows them to start building their nest egg without complicated and time-consuming processes.
It’s interesting to note that about half of the growth we’ve observed in ETFs is being driven by SMSFs incorporating them into their portfolios. That’s a pretty significant impact! If you’re keen to leverage the potential of ETFs in your SMSF, it’s important to follow a few fundamental steps to ensure you’re on the right path.
“Integrating ETFs into your SMSF portfolio can provide a sturdy foundation for your retirement planning
Look at your risk capacity
Kick things off by taking a good, hard look at your risk capacity and investment time horizon for your SMSF portfolio. What are your financial goals? Are you risk-averse, or are you willing to stomach more substantial swings in value for potentially higher returns? How long can you leave your investments to grow before you’ll need to draw on your super? These critical factors should guide your asset allocation strategy and, by extension, your choice of ETFs.
Typically, an SMSF portfolio is made up of a balanced mix of Australian shares, global shares, and defensive assets like gold and bonds. ETFs provide a convenient route to these asset classes. For example, if you want exposure to Australian shares, broad index ETFs, such as the Vanguard Australian Shares Index ETF (VAS), are a popular choice. For global shares, you can turn to ETFs that cover a spectrum of both emerging and developed markets.
Don’t underestimate the importance of defensive assets in your SMSF portfolio, like high-quality government bonds and gold. In the roller coaster world of investing, these assets can be your safety bar. They offer a level of protection during volatile market downturns, adding much-needed stability to your portfolio.
Thematic and niche ETFs
Beyond the core assets, your SMSF portfolio may benefit from some spice – enter thematic or niche ETFs. These are designed to add unique characteristics and the possibility of higher returns to your investment mix. Some examples include ETFs investing in areas such as renewable energy or disruptive technology.
Managing your SMSF
When it comes to the nitty-gritty of managing ETFs within your SMSF portfolio, you’re faced with two primary choices. You can choose a self-managed approach, taking control of the selection, weights, and rebalancing of ETFs based on your investment time horizon and personal preferences. Alternatively, you could call in the professionals and use a service like Stockspot.
At Stockspot, we take pride in offering comprehensive portfolio solutions, and comprehensive tax reporting for SMSFs, ensuring you’re getting the most out of your investments.
For those who enjoy a bit of DIY, we offer an in-depth ETF research report (which we’ve produced for more than 8 years now) to guide your selection process. For those who’d rather leave it to the pros, you can find out more about our full management services for SMSF clients.
In summary, integrating ETFs into your SMSF portfolio can provide a sturdy foundation for your retirement planning. It gives you the reins, ensuring you can guide your future financial health.