Exchange traded funds (ETFs) are growing in popularity among SMSF investors, but are some practitioners missing the boat?
More and more, SMSF investors are using ETFs, with experts suggesting that trend looks set to continue. However, when purchasing ETFs, a significant number of investors haven’t been consulting with an adviser, according to Ilan Israelstam, head of strategy and marketing at BetaShares.
“At the moment, roughly 30 per cent of advisers are recommending ETFs; there’s sort of a disconnect there,” said Mr Israelstam. “That allows for the forward thinking adviser or financial planner to skill up [and] learn about ETFs, because one way or another, their clients, particularly those in SMSFs, will buy them.”
Although ETFs have seen constant growth in recent years, the growth cycle in ETFs has accelerated “dramatically” since approximately 2008, said Mr Israelstam. Research indicates the number of ETFs available on the market has more than doubled since 2010, he added.
According to a joint BetaShares and Investment Trends ETF report, 47 per cent or 33,000 of the 96,500 ETF investors in 2012 were purchasing the funds through SMSFs, indicating they are a “major force” in the ETF landscape.
“SMSFs themselves are one of the major catalysts behind the ETF growth... It’s a [very] important part of the ETF market,” Mr Israelstam said.
Research has also indicated the advisers who advised on ETFs had higher average funds under advice and higher average new inflows in 2012. He added that when SMSFs or investors generally purchase ETFs, there’s a high repeat rate, meaning they’re likely to buy again.
Mr Israelstam said there is a “phenomenal” opportunity for an adviser to learn more and become a specialist or skilled in ETFs so they are able to have a conversation with their clients who will be “inevitably” buying ETFs in the first place.
Experts have described ETFs as a perfect fit for SMSF investors because they are a comparatively low-cost and transparent way of gaining exposure to a variety of asset classes. In addition, administratively, if investors can trade stocks, it’s “just as easy” to use an exchange traded fund, according to Mark Oliver, managing director of retail client business at BlackRock.
“Advice models are focusing increasingly on cost [and] focusing on bringing more diversification into portfolios, particularly in light of the [global financial crisis], where I think a lot of investors found they were overly concentrated in particular areas of the market,” he added.
The additional levels of transparency that an ETF provides will give investors “that higher degree of comfort,” Mr Oliver said, pointing out a daily intraday price on all ETFs is accessible and can be acted on as if it were a single stock.
“Oftentimes unlisted funds may display their holdings on a monthly or a quarterly basis even, whereas an exchange traded fund is there every day,” Mr Oliver said. “That degree of transparency in today’s environment is seen as increasingly appealing to investors.”
ETFs can also provide a degree of comfort to practitioners and investors based on scrutiny they are subjected to, according to Mr Oliver. For example, ETFs are normally subject to managed investment scheme law, the ASX listing rules and the Corporations Act.
“In my view, the regulatory scrutiny upon exchange traded funds is actually in excess of that which unlisted funds are subjected to,” Mr Oliver said.
Although ETFs are generally seen as efficient and low-cost vehicles, he warns there are some factors practitioners should be wary about, including brokerage fees and other costs associated with trading.
“If you’re drip feeding small amounts in on a regular basis, sometimes those economics can be unattractive,” he said. “If you’re paying a fixed brokerage fee to put a couple of hundred dollars to work each month, that can be a relatively high trading cost.”
Understanding the effects of currency on international exposures is important for practitioners, he added, as is ensuring ETF providers are assisting in the process of accessing different markets.
Mr Oliver also said practitioners should understand the benchmarks of different products, because they can be subtly different between providers, and should bear in mind the additional areas for scrutiny, including particular industrial classification differences.
Tim Bradbury, managing director at ETF Consulting, says his advice to practitioners would be to realise that ETFs aren’t threatening and they can “facilitate and enhance” their offering through time, adding that ETFs are a way for advisers to build portfolios with more choice, control and cost management.
“[Practitioners] who probably haven’t given it adequate consideration may see ETFs as either not relevant or threatening to their businesses. That is, all the clients will pick up their money and go direct, [but] the reality is that is not the experience,” Mr Bradbury added.
“When you think about new ideas in financial services, a lot of the industry is hard wired to think a particular way,” he said. “But there’s change on the way and I think some of that change is represented by ETFs.”
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