Strategy over structure
A key challenge investors face is separating the issue of investment strategy from the best way to implement it.
At times the discussion can quickly focus on implementation questions - best products, best structure - rather than the overall investment strategy.
While the selection of the product vehicle is clearly important the pre-eminent decision for investors remains the asset allocation decision because that is what a deep body of research shows is the crucial determinant of your portfolio's performance.
The discussion between the investment strategy and the structure to implement it can easily become blurred. As investors it is natural to want to talk about what shares to buy, what property to look at, what manager's fund to consider...
An example recently has been some of the media debate about whether you are better off investing via exchange traded funds (ETFs) or traditional managed funds.
The debate has no doubt been fuelled by the continuing growth in popularity of ETFs - both in Australia and globally. As of June 30, 2015 total ETF assets stood at $US2.9 trillion which was 11% of total fund assets but what has been clear over the past 10 years is that ETFs have been growing at a faster rate to the traditional fund world.
While the Australian ETF market lagged the global trend initially in recent years it has also been growing strongly and this year to date around $4.5 billion has been invested in the Australian ETF market.
When it comes to any discussion around the right product or structure one simple rule overrides all others - if you do not understand it you should not invest in it. It is critical that as an investor you understand what you are investing in. That is also where getting specialist professional advice can be valuable because professional advisers ought to be able to explain the differences as well as any advantages and disadvantages that certain structures offer.
When it comes to ETFs versus managed a key point to understand is that they share more common characteristics than differences. They are both pooled vehicles that provide exposure to a range of markets and offer diversification usually at reasonable fees. They issue and redeem new units to meet investor demand.
With Vanguard most of our ETFs are a share class of the managed fund so ETF investors share a common investment pool with fund investors. What is different is the way that investment portfolio is accessed - the investor in the unlisted fund either invests via an adviser or directly. The ETF investor buys or sells via their broker and the ASX.
When deciding whether to implement your investment allocation via managed funds or ETFs (or a mix of both) there four factors worth considering: investment strategy, trading flexibility, accessibility and costs.
For investors the investment strategy question comes down to whether you want to take an actively managed approach or primarily an index-based with your portfolio. Most managed funds are actively managed while ETFs are mainly index-based strategies although the indexing concept has been expanded recently to include non-traditional indexes. In fact such indexes represent rules-based active strategies that attempt to outperform traditional market-cap-weighted benchmarks.
The ability to transact at the daily net asset value of a managed fund is likely to offer enough flexibility for most investors. However, the exchange-traded nature of ETFs does give investors more flexibility and the ability for intraday trading - albeit with brokerage costs to be taken into account.
Accessibility is also where some investors favor ETFs because investors have access to any ETF listed on the exchange where platforms used by advisory groups will typically have a restricted or approved product list.
Costs are a key consideration for investors in any investment product. With managed funds the major cost is the management expense ratio. With ETFs there will also be an underlying management expense ratio but you also need to factor in transaction costs for each time you trade.
Whether you opt for ETFs or traditional funds will depend on what type of investor you are.
What is key is to get establish the right strategy for you and then decide on the structure that will allow you to implement it the most cost-effective way possible.
By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
19 October 2015
Hot Issues
- ATO encourages trustees to use voluntary disclosure service
- Beware of terminal illness payout time frame
- Capital losses can help reduce NALI
- Investment and economic outlook, August 2024
- What the Reserve Bank’s rates stance means for property borrowers
- How investing regularly can propel your returns
- Super sector in ASIC’s sights
- Most Popular Operating Systems 1999 - 2022
- Our investment and economic outlook, July 2024
- Striking a balance in the new financial year
- The five reasons why the $A is likely to rise further - if recession is avoided
- What super fund members should know when comparing returns
- Insurance inside super has tax advantages
- It’s never too early to start talking about aged care with clients
- Capacity doubts now more common
- Most Gold Medals in Summer Olympic Games (1896-2024)
- SMSF assets reach record levels amid share market rally
- Many Australians have a fear of running out
- How to get into the retirement comfort zone
- NALE bill passed by parliament
- Compliance focus impacts wind-ups
- LRBA interest rates increase for 2025
- Income-free areas set to increase from 1 July
- Most Spoken Languages in the World
- Middle-to-higher incomes boosting SMSF growth
- Investment and economic outlook, May 2024
- Transitioning into retirement: What you should know
- Plan now to take advantage of stage 3 tax cuts
- Deeming freeze a win for Age Pensioners
Article archive
- April - June 2024
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
- January - March 2015
- October - December 2014
October - December 2015 archive
- Should we expect stormy skies or sunshine in 2016?
- Merry Christmas and Happy New Year 2015
- There's no one-size-fits-all retirement income
- Market Update – 30th November 2015
- Diversifying and cutting costs with ETFs
- Why the ATO’s new powers make SMSF compliance more important than ever
- 'Unretiring' retirees
- The detrimental impact of poor SMSF record-keeping
- Counting the cost of 'grey' divorce
- Combining total-return investing with realistic investment expectations
- Market Update – 31st October 2015
- Another telling reminder for SMSF trustees
- Death in paradise – or your SMSF
- Elderly exploited for assets
- Intergenerational challenges for retirement saving
- Death benefits – navigating the minefield
- Strategy over structure
- Market Update – 3oth September 2015
- SMSF and limited resource borrowing – a warning
- External partnerships and the in-house asset rules
- Take a closer look at SMSF age demographics