“The international ETF offerings allow for tilting of a portfolio where appropriate, although we have tended to pull away somewhat and use managed funds instead due to the lack of hedging,” Baker says.
“Still, ETFs can suit any client as part of a core strategy and are a great product for SMSFs.”
Laidlaw says that while hedging on international ETFs does raise currency questions for consumers, investors need to be aware that this type of ETF is a journey and not a destination.
“You have to be prepared for some volatility along the way,” she says.
Keenan adds that with unhedged international ETFs, currency returns matter, but that the currency exposure is actually [related] to where the basket of underlying shares comes from.
“Advisers will tend to have a hedging policy in place and use international ETFs as the unhedged component,” he says.
“There is a market risk with ETFs, as with any other investment. ETFs are another tool to use – not an end-to-end solution.”
Douglas Turek, managing director of independent planning firm Professional Wealth, has a slightly different take on ETFs. For almost five years, he’s been advising his clients (including executives, CEOs, lawyers, consultants and retirees) into unlisted index funds and sees only a modest advantage in using ETFs instead.
“What an ETF offers the retail investor is already available through unlisted index funds, although growth in ETFs may accelerate interest in these type of investments overall,” Turek says.
“I don’t see much difference between them, apart from ETFs being a new manifestation to access the product.
“If a business was based around trading, or an individual was more comfortable with that style of product, EFTs might be an attractive product. But if a client or an adviser is not used to buying and selling stocks, it would actually be harder to trade ETFs than to use unlisted funds.
“In fact, we see a couple of cases where unlisted funds may be more attractive than ETFs – if a client is retired and not paying tax on investment income, under the international ETF products available here, 15 per cent tax would be withheld by the US Government. It may be more tax efficient in this case for the client to invest in a domicile unlisted fund, where no withholding tax applies.
“Secondly, if a client is making regular investments, rather than investing a large lump sum, the buy/sell spread of an unlisted fund is likely to be less than the brokerage fees associated with investing in an ETF.
“If an ETF proves to be cheaper than an index fund already being used, the cost saving may not be material relative to the cost of changing and so might not present a compelling reason to change.”
Turek says ETFs will only become popular with advisers if the ETF offering allows them to access things they couldn’t already.
Similarly, he says although ETFs could be used under SMA and IMA structures, if they cut across the adviser’s value proposition, it’s unlikely that they will be used other than in a secondary or supporting role. Another issue Turek is wary of is hidden technical issues, and he says advisers who are considering using ETFs should ask the provider about their policy on securities lending.
Alan Dixon has been at the helm of 24-year-old firm Dixon Advisory & Superannuation Services Ltd for almost ten years. His firm administers 3200 SMSFs, with some $3 billion in assets. He says with SMSFs having experienced 24 per cent compound growth since 1995, ETFs are a great way for his clients to gain exposure to the Australian stockmarket.
“Our largest ETF holdings are in STW (State Street SPDR200 ETF) and GOLD (ETF Securities’ Physical Gold ETF). We have used the Gold product [via] both ASX trading and physical lodgement and have been very happy with it,” Dixon says.
“We also use ETFs as a ‘placeholder’ when setting up a SMSF, putting the total funds into ETFs to keep the client in the market and then selling down as we invest in various other securities.”
Dixon says while his group has some interest in the international ETF offerings, they are domestically focused at this point. He says based on the ten-year average returns on the Australian market compared to the rest of the world, Australia remains their primary focus. Conversely, Keenan says that growth in emerging markets has outstripped forecasts over the past five years and they are no longer viewed as risky, as they once were.
“Advisers are shifting the way in which they view global equity markets and introducing tilts towards emerging markets,” Keenan says.
“Investing in emerging markets and mixing that with developed markets gives the benefits of diversification without increasing the risk, as measured by standard deviation.”
In a tactical use of ETFs, Dixon’s firm purchased $30 million of physical gold in September 2007, had it directly delivered to the vaults of HSBC in London, and had share certificates issued for GOLD ETFs. An executive director of Dixon Advisory, Chris Duffield, says that at the time, the group was becoming nervous about global debt levels and felt gold would be a good hedge against equity markets. Looking at overall exposure to Australian securities, they advised their clients to transfer on average 5 per cent of their holdings to physical gold.
“Although we had decided to move into gold, we had concerns about the stability of our financial institutions and wanted to eliminate counterparty risk as much as possible,” Duffield says.
