SMSFs are stepping up their use of managed funds and ETFs. Increased diversification, saving time, and risk management are among the key reasons…

Australian self-managed super funds are steadily increasing their use of managed funds and exchange traded funds (ETFs).

The 2023 Vanguard/Investment Trends SMSF Investor Report, released in June, has found that 255,000 SMSFs (42% of the total SMSF population of around 606,000 funds) are now using managed funds in their portfolio.

This represents a 24% increase on the 205,000 SMSFs that were using managed funds when the previous Vanguard/Investment Trends SMSF Investor Report was released in June 2022.

Meanwhile, the proportion of SMSF assets invested in managed funds remains unchanged from last year at 9% on a dollar-weighted basis.

At the same time, the 2023 SMSF Investor Report has found that 205,000 SMSFs (about 34% of all SMSFs) have ETFs in their portfolio. This represents a 32% increase on the 155,000 SMSFs that were using ETFs in 2022.

In addition, 155,000 SMSFs are planning to re-invest in ETFs during the next 12 months and a further 65,000 SMSFs are planning to make their first ETF investment during the next 12 months.

The proportion of SMSF assets invested in ETFs also remains unchanged at 5% on a dollar-weighted basis.

Behind the growth in usage

The primary drivers behind the increased usage by SMSFs of managed funds and ETFs are broadly similar.

Investment diversification was the main reason cited by 50% of SMSF investors using managed funds, and by around 70% of SMSF investors using ETFs.

Around three quarters of SMSF investors (76%) considered themselves to be appropriately diversified across asset classes, 55% by geography, and 74% by sectors.

Saving time on trying to choose individual stocks was a key reason for 45% of SMSF investors using managed funds and for close to 50% of SMSF investors using ETFs.

Avoiding risk of individual stock exposure was a driver for 42% of SMSF investors in managed funds, while gaining exposure to specific overseas markets was cited by 52% of SMSF investors using ETFs.

Other reasons nominated by SMSF investors for using managed funds were exposure to active management (40%), access to specific sectors (36%), and access to specific types of investments/asset classes (32%).

For SMSF investors using ETFs, other factors nominated were liquidity/easy to buy and sell (48%), access to specific types of investments/asset classes (45%), and to provide a good portfolio core (39%).

Asset class exposures

The 2023 SMSF Investor Report has found that investing in international shares was of most interest to SMSF investors using managed funds (41% of respondents), followed by Australian mid and small cap shares (35%), and Australian large cap shares (33%).

Other asset allocations of interest were Australian property (15%), infrastructure (12%), and Australian fixed income (11%).

For SMSF investors using ETFs, the areas of most interest were international shares (73% or respondents), Australian shares (63%), thematic investments (19%), Australian fixed income (16%), Australian property (15%), and infrastructure (14%).

The proportion of SMSF investors that made substantial changes (more than 10%) to their asset allocation has remained consistent with the historical average at 36% (in 2020 and 2021 this figure rose to about 45%).

SMSF investors are starting to again increase their allocation to cash and cash products (22%, up from 18%), with direct shares seeing the largest relative decline (31%, down from 36%). Meanwhile ‘all other investments’, which includes alternatives, has grown by 50% in the past year (from 4% to 6%).

Looking at the year ahead, SMSF investors are split three ways in the main objective that will drive their investment selection. Balance between growth and risk (cited by 28%), capital growth focus (27%) and income focus (27%).

Those SMSF investors who are highly attuned to the effects of the current economic conditions already have a heavier allocation to cash and cash-related products, as well as investment property.

They are also vastly more likely to look for capital protection (cited by 16% of SMSFs that are sensitive to economic conditions, versus 12% overall).

The 2023 SMSF Investor Report found that SMSF investors intend to invest in a wide range of asset classes, most often blue-chip domestic shares, ETFs and global equities.

Those influenced by economic conditions are more likely to plan to use high-yielding shares, term deposits and bonds.

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