Stocks Special Reports LICs Credit Technical Analysis Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features Technical Analysis SMSFs Learn


Why SMSFs use ETFs

Alex Vynokur  |  25 Aug 2016Text size  Decrease  Increase  |  

Page 1 of 1

The two acronyms "SMSF" and "ETF" are responsible for some of the largest changes to the Australian investment landscape in recent years.

In this article we examine some of the reasons why exchange-traded funds have become so popular with self-managed super fund investors.

SMSFs are the largest and fastest-growing segment of the Australian retirement savings pool, while ETFs are one of the fastest-growing categories of investment products in Australia, paralleled by massive growth in the ETF market globally.

The connection in the growth of SMSFs and ETFs is not a coincidence--the forces driving the massive surge in the popularity of both are essentially the same, that is, investors' desire to:

• Take control of their investments;

• Reduce the costs of investing;

• Improve transparency and simplicity in their investments; and

• Improve the tax outcome of investments.

Of course, investor research shows there are numerous other reasons for the popularity of SMSFs and ETFs, but these are the main themes driving demand.

When we dig beneath the surface we can see some powerful opportunities for SMSF investors who adopt ETFs as part of their investment portfolios.

Control and turnover

Apart from the fact SMSF trustees control exactly what they invest in, they are also able to adopt a long-term, buy-and-hold approach to investing that is difficult for conventional super funds to mimic.

Because SMSFs are aligned specifically to the needs of their trustees and members (normally the same), they can be used to build a portfolio around their specific retirement needs.

Buying shares or property and holding the assets until they ultimately are sold down in retirement (or hopefully not at all) is difficult to achieve when using traditional managed funds.

This is because traditional actively managed funds will buy and sell shares frequently to try to outperform their benchmark.

As a result, actively managed funds will usually have high levels of turnover, which acts as an after-tax performance "drag".

Lower turnover reduces the number of tax events, lowers costs associated with trading and can also help by allowing franking credits on share dividends to accumulate over time.


All of this fits neatly with the key design features of ETFs. Because ETFs seek to track an index (or provide access to an asset class), the turnover within the ETF is essentially the same as the turnover in the index.

Traditional indices like the S&P/ASX 200 only change in composition in limited circumstances such as when indices rebalance or when corporate actions occur (for example, bonus or rights issues).

That may lead to a better after-tax outcome for investors holding an Australian shares ETF compared with an equivalent actively managed fund.


Cost control is one of the best ways to improve the overall return of your investments.

The impact of an annual investment cost of, say, 1 per cent per annum over the term of the investor's life creates a significant drag on investment performance.

ETFs typically involve far lower costs than traditional actively managed funds.


(Fees have a significant impact on investment returns--the table above indicates the value of $100,000 invested in the S&P/ASX 200 Index (total return) with a fee of 2 per cent per annum versus 0.40 per cent per annum over a 10-year period.)

SMSF trustees are looking to take control of their investments, reduce costs and improve tax efficiencies.

ETFs tick all those boxes and may be a worthy consideration for SMSF trustees as an investment for their fund.

More from Morningstar

• A question of style

• What is an emerging market?


Alex Vynokur is the managing director of BetaShares. This article initially appeared on in June 2014. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.