Financial Planning

Exchange Traded Funds (ETFs) have grown in popularity since they first listed on the ASX in 2001. Yet, while the assets under management in ETFs has grown to over $60bn in the last 19 years, this still only represents 2.5% of the entire $1.6trn asset management industry.

The popularity of ETFs is a result of two main factors; the benefits they bring to investors, and the relative underperformance of most fund managers over the long term.

What are the benefits of Exchange Traded Funds?

The key benefits of ETFs are:

• They’re low cost,
• They’re tax effective,
• They can diversify your portfolio in single trade, and
• They offer flexibility – i.e. they can be long term buy and hold or offer trading exposure

What are some examples of ETFs in the market?

Traditional ETFs track stock market indices such as S&P500 (which brings together the 500 largest listed US companies), NASDAQ (US Technology companies) or the ASX 200 (Australia’s largest 200 listed companies).

These ETFs hold the same percentage of stocks as they represent in the index. For example, if CBA is 10% of the index, the ETF will hold 10% of your money in CBA. If BHP is 8% it will hold 8% in the ETF and so on.

With the popularity of ETFs, you have seen more ETFs added to the exchange which provides investors the opportunity to expose their portfolios to specific investment options. For example, one way to gain gold exposure is to buy a basket of global gold mining companies in one trade under the ASX code GDX.

Why would you consider investing in ETFs?

ETF providers have been innovative in their development to encroach on active managers ‘space’ with funds designed to capture ‘alpha’; with alpha being the return you receive above the index. They can do this by ranking the holdings according to ‘factors’ such as quality, value and income.

Using quality as an example, historical investment research highlights that companies showing quality characteristics, as defined by three factors have outperformed over the long term. These are:

1. High return on equity
2. Stable year on year earnings growth
3. Low financial leverage

These strategies have traditionally been exclusive to ‘active’ investment managers which have previously charged high fees to access. These ETFs provide exposure to ‘active’ style investment management at a lower cost.

Another area where ETFs have benefited investors is by providing exposure to investment themes that have traditionally been hard to access or single out as a trading theme.

For example, there are ETFs that can provide exposure to companies listed in individual countries which have traditionally been hard to access such as China, South Korea and India.

There are also themes within countries such China New Technologies, which invests in healthcare, technology, consumer staples and discretionary stocks in China. The theory behind this exposure is to benefit from the growing wealth of the Chinese middle class, a trend which is expected to be ongoing for many years as the Chinese economy prospers.

Further focused exposures include global healthcare, oil, food, cybersecurity, and banks. These ETFs allow you to trade your view and hopefully achieve higher returns than having a broad base exposure to the overall market.

Another investment theme that is continuing to attract consistent investor interest is ethical and sustainable investing. ETFs are a great way to expose your portfolio to this theme as they are low cost where funds have traditionally been high cost for retail investors.

These ETFs provide a basket of ethical and sustainable exposures in both Australia and globally. The ethical standards are clearly outlined by the ETF provider and you can rest assured these standards will be followed closely. If you believe companies that meet the ethical or sustainable criteria will perform better than companies that do not meet the criteria, this can be a good way to achieve returns higher than the traditional market cap weighted indices.

Where to learn more about ETFs

I have completed a two part podcast with VanEck Exchange Traded Funds talking in depth about why ETFs benefit investors and how their ETFs might provide returns that are different to the index. We also delve into six of their funds which I think will benefit investors and two that VanEck highlight as worthy of consideration. You can subscribe to the Talk Investment with Mark Wenzel podcast on your favourite platform or listen here.

Otherwise, if you would like to discuss ETFs and whether they will benefit your portfolio, please contact The Hopkins Group to speak with a financial adviser today!

I recently had the pleasure of sitting down with Grant Hackett to record a podcast on investment bonds. While many will know Grant from his time in the pool and as a multiple Olympic champion, Grant is now the CEO of Generation Life, a company that specialises in investment bonds.

What are investment bonds and what are they used for?

The use of investment bonds in your wealth creation will depend on what you want to own the investment bonds for. They are flexible wealth creation or wealth transfer tools.

Investment bonds are created under the life insurance act and are therefore an insurance product not an investment product. This creates some significant advantages for people that use them.

The main advantages of investment bonds are that they:

• are a tax effective investment structure, second only to superannuation. The maximum tax rate is 30%. Their tax effectiveness also increases depending on the investments option. The effective tax rate can be reduced to as low 15-20%;
• do not form part of your will. This ensures the beneficiary you want to receive the proceeds of the investment bond will receive it, with no risk of legal challenges;
• can be transferred without triggering a tax event, making them very flexible for wealth transfer when you are alive.

What are the benefits of investment bonds?

There are five broad areas where investment bonds are used for a strategic benefit. These are:

1. Alternative to superannuation

Investment bonds are the second most tax effective structure after superannuation. They may appeal to you as an alternative to super if:

• You are reaching the maximum $1.6m tax free limit
• You’re looking for alternatives to the constantly changing superannuation rules
• You want access to the money before you reach age 65

If these situations apply for you, investment bonds could be a good alternative.

2. Trust distributions

Clients who have trusts that do not want to distribute money from the trust because it will pass a tax liability to the beneficiary can consider investment bonds as an alternative. The money is invested in the trust instead of distributing. After ten years the investment bond can be wound up and distributed to beneficiaries as a tax paid distribution.

3. Helping children

The most common reason people look to investment bonds in this example is to help you save for a child’s education. The parent or grandparent can start the investment bond and make regular contributions to pay for the child’s education.

This strategy can extend to helping a child save for a deposit on a house by making regular investments to the bond over time and passing the proceeds to the child tax free when they are ready to buy.

4. Estate planning

Investment bonds are not passed through the will meaning that they cannot be challenged. This effectively gives you a binding nomination on your passing.

The person or organisation you want to receive the proceeds of the bond will receive the proceeds of the bond.

Further advantages for estate planning are that you can ‘rule from the grave’ in that you can determine at what age the beneficiary receives the proceeds, you can provide a regular income rather than a lump sum and you can limit access for life events.

5. Aged care & Centrelink benefits

The rules around these are difficult to write in brief, but investment bonds can used to increase access to the age pension and to assist in funding aged care places. These are complex and will vary from case to case.

If you are around the limits of the age pension or you or one of your family needs to access assisted age care, speak to your adviser to discuss how investment bonds might be used to improve your situation. 

What are some of the rules around investment bonds? 

Aside from these benefits, there are also a few key rules you need to know about before investing in investment bonds.

• You can invest as much as you like in the first year of the bond but can only invest 125% of the previous year’s contribution. Say you invest $20,000 in the first year, the maximum you can contribution in the second year is $25,000. If you contribute $25,000 in the second year, the maximum in the third year is $31,500 and so on.
• If you don’t make a contribution in any one year, you will not be able to contribute to future years. You will need to start a new investment bond for further contributions.
• You can access your funds at any time, but to get the full tax benefit from investment bonds, you need to hold the bonds for at least ten years.

Investment bonds can be a great tool for your wealth creation. The financial advisers at The Hopkins Group can advise on whether you will benefit from investment bonds as part of your financial plan. Contact an adviser at The Hopkins Group today to help you prepare your ideal future.

You can hear the full interview with Grant Hackett on the Talk Investment with Mark Wenzel podcast. You can listen to the podcast here or subscribe on your favourite podcasting player.