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ETFs: A Low Cost, Simple and Tax Efficient Investment for SMSFs
ETF use amongst SMSFs has grown in recent years because investors have realised the immense value proposition of an easy to access, low cost and tax efficient tool to attain equity diversification through a single investment.
Through the continued use of ETFs as asset allocation, tax management, rebalancing and transition management tools, their usefulness to the SMSF investor should only grow in the years to come.
Typically structured like managed funds, but listed and traded on an exchange like stocks, exchange traded funds (ETFs) are flexible trading and investment vehicles that can be used to help the Self-Managed Superannuation Fund (SMSF) investor satisfy a number of critical investment needs.
ETF use amongst SMSFs has grown in recent years because investors have realised the immense value proposition of an easily accessible, low cost and tax efficient tool to attain equity diversification through a single investment.
SMSFs: lower fees and greater control of your investment
SMSFs (or do-it-yourself [DIY] superannuation funds) account for approximately 25% of all superannuation assets in Australia, with over $675 billion in assets1. SMSFs provide members with control over the choice of their investments as defined by their trust deed and investment strategy, the fees being paid and the timing of capital gain realisation.
ETFs can add value to investors through their low management cost, transparent, easy to understand investment strategies and administrative simplicity.
ETFs are typically low cost, simple, tax efficient and an easy to access investment
ETFs are investment funds that trade just like stocks. While they are referenced via a ticker on an exchange, they represent a basket of securities that can target a broad index such as the ASX 200, or target a niche segment such as Australian Resources.
Originally introduced as a tool for institutional investors to invest their cash reserves, ETFs proved to be popular with SMSF investors as well due to their “instant diversification” potential. In addition, the following factors make ETFs a low cost, simple, tax efficient and easily accessible investment for a well-diversified SMSF investor:
An ETF will usually trade at or close to its net asset value (NAV) and is available to be bought or sold whenever the exchange itself is open for business. As they can for stocks, investors may use limit orders to buy or sell ETF units at desired levels, or stop orders to insure against losses.
Unlike managed funds, the holdings of most ETFs are fully transparent and available daily. This full disclosure enables investors to make more informed portfolio decisions with greater accuracy.
ETFs often have lower costs and fees than comparable managed funds due to their lower overhead and staffing costs.
ETFs are generally more tax efficient than their managed fund counterparts. ETF investors can decide when to sell their ETFs and any associated capital gains taxes are paid at the time of final sale, controlling the timing of tax consequences.
An important tool for asset allocation and tax management
ETF use amongst SMSFs has grown in recent years because investors have realised the immense value proposition of an easily accessible, low cost and tax efficient tool to access diversified asset class or niche exposure through a single investment.
However, ETFs are also becoming increasingly important instruments that can help the SMSF investor with asset allocation, tax management, rebalancing and transition management.
Asset Allocation Asset allocation is considered the largest driver for long term investment results. However, asset allocation strategies have historically been difficult for many SMSF investors to implement, given the cost, research efforts and asset size required to achieve a proper level of diversification.
Since their launch in 2001, the SPDR® S&P® /ASX 200 Fund (STW) and SPDR® S&P® /ASX 50 Fund (SFY) have been good choices for investors wishing to gain broad-based Australian stock market exposure through low cost, easily accessible exchange traded funds.
These particular ETFs can form the indexed equity “core” of a SMSF investment portfolio that has the ability to take on clearly understood equity exposure at a relatively low cost. Additionally, investors can access a range of new market segments and asset
classes, including real estate investment trusts (REITs), global equities, emerging markets, currency, fixed income, commodities, and smart beta.
Tax Management Although ETFs are tax efficient vehicles that could allow investors to time tax consequences of capital gains, they can also be utilised to help SMSFs in accumulation mode minimise their tax bills in other ways.
ETFs ‘pass through’ franking credits from the dividends it receives from constituent companies. For example, investors holding STW on and around the four distribution dates (March, June, September and December) typically receive valuable franking credits along with the dividends to the extent they have been paid by the constituent companies.
Franking credits represent company taxes already paid on corporate profits and can be passed along to shareholders with normal dividends as an “IOU” from the tax office. This credit, in essence, eliminates the double taxation of profits at both the corporate and personal level.
Rebalancing As investors near retirement they may choose to position their investments more conservatively and opt for a higher yielding equity ETF. The targeted exposure and deep liquidity of some ETFs allow for the simple implementation of periodic portfolio rebalancing. At its most basic level this will involve buying or selling investments, such as ETFs and individual stocks, in relatively small amounts to re-establish the fund’s predetermined asset allocation.
Short Term Cash Management ETFs can provide a ready, liquid and low cost investment to help bridge the gap between two other investments. If a SMSF redeems from an external manager or some other investment, and plans to roll the proceeds into a new investment that it has not decided on yet, an ETF could be used as a temporary placeholder for those assets.
1 Quarterly Superannuation Performance Statistics, March 2020, Australian Prudential Regulation Authority.
SSGA Australia is not licensed to give tax advice and the information represented in this material does not constitute legal, tax, or investment advice. Investors should consult their legal, tax, and financial advisors before making any financial decisions.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL"). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com.
State Street Global Advisors, Australia Services Limited (ASL) (AFSL Number 274900, ABN 16 108 671 441) is the issuer of interests and the Responsible Entity for the ETFs which are Australian registered managed investment schemes quoted on the AQUA market of the ASX or listed on the ASX. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF. This material should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Holdings and sectors shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future. Sector ETF products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. SPDR and Standard & Poor's® S&P® indices are trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by State Street Corporation. The Dow Jones Global Select Real Estate Securities Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by State Street Global Advisors, ASL. MSCI indices, the property of MSCI, Inc. ("MSCI"), and ASX®, a registered trademark of ASX Operations Pty Limited, have been licensed for use by State Street Global Advisors, ASL. SPDR products are not sponsored, endorsed, sold or promoted by any of these entities and none of these entities bear any liability with respect to the ETFs or make any representation, warranty or condition regarding the advisability of buying, selling or holding units in the ETFs issued by State Street Global Advisors, ASL. State Street Global Advisors Trust Company (ARBN 619 273 817) is the trustee of, and the issuer of interests in, the SPDR® S&P 500® ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol "SPY". State Street Global Advisors, ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or "CDIs") which have been created over units in SPY and are quoted on the AQUA market of the ASX. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors, ASL's express written consent.