Why a growing number of trustees are switching to ETFs and managed funds.
A growing number of self managed super fund (SMSF) trustees are using exchange traded funds (ETFs) and managed funds as core parts of their investment portfolio, the 2024 Vanguard/Investment Trends SMSF Report has found.
The 19th edition of the annual report, which reflects the trends and demographics of Australia’s SMSF investors based on a comprehensive survey of this cohort of investors conducted between February and March 2024, has found that around 43% of SMSFs (265,000 funds) are using ETF products.
In fact, the average portfolio allocation to ETFs by SMSFs has almost doubled over the last 12 months from 5% in 2023 to 8% this year.
SMSFs now account for 13% of Australia’s total ETF investor population, which numbers around two million.
This number is likely to continue to rise, with 175,000 SMSFs (28%) expected to reinvest in ETFs over the next 12 months (up from 155,000 in 2023), and a further 65,000 (10.6%) likely to make their first ETF investment over the same period.
The growth in allocation to ETFs is the outcome of both increased adoption (57%, up from 45% in 2023) and increased average amount allocated ($250,000, up from $180,000 the year before).
This increased allocation to ETFs is observed across both advised and non-advised SMSFs, with non-advised SMSFs contributing to the bulk of the increase. Interestingly, nearly 60% of newly established SMSFs intend to invest in ETFs over the next 12 months.
Meanwhile, the number of SMSFs using managed funds has risen from 255,000 in 2023 to 285,000, representing 46% of the SMSF population. On average, SMSFs have around 9% of their assets invested in managed funds.
The average amount allocated to managed funds by SMSFs is around $350,000.
The general shift to ETFs and managed funds has seen SMSF trustees reducing their allocations to cash holdings over the last year (from 22% to 18%) and to direct shares (from 31% to 27%).
Cash products typically receive the second largest allocation in SMSFs after Australian shares. The decline in allocation to cash in the past year may suggest SMSFs are reasonably comfortable with the yield generated from their other investments.
Why SMSFs are using ETFs and managed funds
The primary reasons SMSFs say they are using ETFs is for diversification (71%), to gain exposure to specific overseas markets (54%), liquidity (easy to buy and sell) (44%), and because ETFs save time over choosing individual stocks (43%).
They also see ETFs as providing easy access to specific types of investments and asset classes (42%), as a good portfolio core (38%), as being competitively priced (31%), readily available on investing platforms (18%), and having transparency (16%).
In terms of how SMSFs are allocating their capital to ETFs, the biggest asset class exposures are international equities (76% of respondents), Australian equities (69%), followed by Australian fixed income (16%), and commodities (14%).
Australian Securities Exchange (ASX) and Vanguard data shows international equities continued to gain the biggest investor inflows in April, capturing $676 million in investments – around 74% of the total ETF inflows.
This amount included $576 million in inflows into the broader global equity ETFs category as investors continued to focus on equity products covering United States markets and products with a wide spread of international shareholdings.
Similar to investing in ETFs, the main investment areas cited by SMSFs for using managed funds are international shares (around 41%), large cap Australian shares (29%), mid and small cap Australian shares (28%), and Australian listed property (13%).
The Investment Trends data shows Vanguard remained the primary product provider in Australia for both ETFs and managed funds for SMSFs at the time the survey was conducted.
“We are proud that our low cost, diversified products are resonating with some of Australia’s most sophisticated investors,” said Renae Smith, Chief of Personal Investor, Vanguard Australia.
Looking ahead, a growing proportion of SMSFs are focusing on building a sustainable income stream (31% versus 27% in 2023). The top three products they plan to invest in are blue-chip Australian shares (59%), ETFs (39%), and international shares (28%).
Additionally, one in 10 SMSF trustees mention investment property as a planned investment.
Feel free to contact our investment team to find out how we can help you reach your financial goals. Give us a call at 08 8231 4709 or send us an email at info@centrawealth.com.au.
Article courtesy of Vanguard.
