Australian investors are amongst the highest owners of direct shares in the world but while there are more than 2000 companies listed on the Australian Securities Exchange (ASX), the vast majority of self-managed super fund (SMSF) investments are within a handful of stocks, according to Amanda Skelly, head of SPDR ETFs Australia for State Street Global Advisors.
Pointing to SMSF administrator Multiport's June 2013 survey of around 1950 SMSFs, Skelly said that these investors held around half of their Australian equity allocation in just 10 companies.
"That's quite meaningful," she said. "If you look at a typical SMSF portfolio, the allocation to those few companies is quite a large holding.
"Similarly, if you look at where else they're investing, you don't see a lot of international shares, for example," Skelly continued.
"So they're very overweight to the bluechip stocks, particularly the banks, and while we don't know what else they might be invested in outside of their actual super fund, I think it is fair to say that, by and large, these are investors who are often quite underdiversified."
And while Skelly said she understood the attraction of bluechip stocks in terms of familiarity, that did not mean that there weren't other compelling options out there.
"Look, we know SMSF trustees like to read the daily papers, they like to be on Bloomberg, on the ASX, so they can get information on these companies very easily," she said.
"But the nice thing about an exchange traded fund (ETF), particularly for an SMSF, is that it kind of operates very similarly to a stock.
"You can trade it on the exchange, through your broker, through your adviser, whichever way you prefer," Skelly continued.
"And you see the transparency; they're lower cost than a lot of the managed funds out there so it's a little bit easier for SMSF trustees to understand how to work that in their portfolio."
According to Skelly, the other big benefit of an ETF was the reality that it gave instant diversification.
"It just gives you that instant diversification with a single trade," she said.
"It's an investment that can be quite simple and what we find is that a lot of SMSFs won't stop holding individual stocks because they do like to do the research, and the reality is that they actually enjoy it a lot of the time.
"But they'll do that and then to fill in some of those gaps in sectors and some of the other segments of the market that they're not familiar with, they'll use something like an exchange traded fund."
Yet as simple as the exchange traded fund concept can be, Skelly said that the industry's greatest challenge lay in education and awareness.
"There are always opportunities to get out there but the reality is that you don't open up the Australian Financial Review every day and see a story around exchange traded funds," she said.
"So trying to find other ways to educate SMSF trustees through our website, through attending events, through their advisers or their brokers is the approach that we've been taking.
"But we've also seen a lot of growth in ETFs this year and some of that's attributed to the fact that SMSFs are getting more and more comfortable with ETFs," Skelly added.
"They're still the largest users in Australia, which is not a surprise to many, so we're getting there – but I think we've still got a long way to go.
"Clearly, the familiarity and also some of the tax benefits of holding companies directly make a lot of sense for SMSF trustees, but what we'd also advocate is looking at something like an ETF to get diversification into your portfolio that you might not otherwise have."
Originally published by SMSF Essentials.
