Why popularity of ETFs is surging among SMSFs

The 2015 Self Managed Super Fund Report - published over the past week by Vanguard and specialist researcher Investment Trends -reports that the number of SMSFs holding ETFs rose by 53 per cent over the 12 months to April.

And the three biggest reasons given by SMSFs for their decision to invest in ETFs are to further diversify their portfolios (more than 70 per cent of funds), to access overseas markets and to invest at a low cost.

Appropriately diversifying a portfolio within an investor's long-term, strategic or target asset allocation and keeping investment costs to a minimum are among the most critical principles for seeking sustained investment success. (You may be interested to read more on this in Vanguard's principles for investing success.)

Other key findings in the 2015 Self Managed Super Fund Report relating to ETFs include:

• SMSFs make up 43 per cent of Australia's 191,000 investors in ETFs. Although SMSFs were among the first investors to embrace ETFs in Australia, their popularity is also rapidly growing among non-SMSF investors.
• 56,500 SMSFs intend to make their first ETF investments over the next 12 months.

During the research for the 2015 Self Managed Super Fund Report, SMSF trustees were asked: "What are hardest aspects of running your SMSF?"

The largest percentage of respondents to this question, 32 per cent, name "choosing what to invest in" as by far their biggest challenge in managing their SMSF - markedly up from 12 months earlier.

It is clear that numerous SMSF trustees are turning to ETFs as an answer to the investment challenge of what to invest in and how to diversify. Often this would involve SMSFs adopting a core-satellite strategy.

Under the core-satellite approach, investors hold the core of their portfolios in a diversified range of ETFs and/or traditional index funds and then with much-smaller satellites of favoured actively-managed funds and directly-held shares.

Further, the 2015 Self Managed Super Fund Report highlights once again that SMSFs continue to hold a large portion of their assets in a relatively small number of direct shares and in "excess cash". (Excess cash is defined as cash that would usually be invested elsewhere when investors recognise an opportunities. This cash tends to build up during times of increased market volatility.)

SMSFs hold an average of 18 different direct shares in their portfolios with 52 per cent being bank/financial and resource stocks. It is crucial that SMSF trustees recognise the degree of risk being carried in such portfolios.

Again, ETFs and other managed funds are providing a means for SMSFs with a high exposure to relatively few direct shares and to excess cash to efficiently and easily diversify to spread their risks and opportunities.

* The 2015 Self Managed Super Fund Report is based on a survey of almost 4000 SMSF trustees and 500 financial advisers.

By Robin Bowerman
Smart Investing 
Principal & Head of Retail, Vanguard Investments Australia
24 July 2015