Specifically we'll be taking a look at AustralianSuper's MemberDirect option and ING Direct Living Super's Shares option. Both of these options allow investment in individual companies on the Australian Stock Exchange (ASX) as well as a range of Exchange Traded Funds or Listed Investment Companies.
An Exchange Traded Fund (ETF) is basically a managed fund which trades like a share on the ASX. Typically ETFs have lower ongoing management costs than an equivalent standard managed fund but you do need to pay brokerage to purchase them, just like a share. The ETFs that align with the investment approach I've been talking about are again Index Funds. A Listed Investment Company (LIC) is typically more like an Actively Managed fund rather than an Index Fund, however there are some low-fee Listed Investment Companies and there may be a LIC which provides access to assets or an investment style not easily available in (Index) ETFs. Index ETFs typically trade very close to their Net Asset Value (NAV), the price of the underlying shares or bonds in the index. Listed Investment Companies may trade below or above the NAV depending on the market perception of the value added (or subtracted) by their management (needless to say, the evidence on active management is not in its favour). Some ETFs and LICs target physical or synthetic exposure to commodities or currencies; As these are not income generating I personally do not see their value as an investment (I do notice neither AustralianSuper nor ING seem to include synthetic commodity ETFs within their options at time of writing: I personally would be concerned with synthetic ETFs about the additional counterparty risk embedded in such products).
What are ETFs useful for?
We've seen that a number of funds already have low-cost access to basic asset classes through index funds: Australian and (Broad) International Shares, Bonds, Property, Cash. So the primary purpose of ETFs in an index-fund-based portfolio is diversify into or 'tilt' towards specific types of assets that may not be well-represented by the broad asset classes, or to lower costs further where this is possible.
To make this more tangible, some specific examples that are available include:
Exposure to Small Company Shares (in Australia or the US)
Exposure to specific Country or Region Shares (US, Europe, Specific Asian Countries)
General exposure to Emerging Markets or 'BRIC' Countries
In addition, the cost of some 'core' components of a portfolio may be lower in some cases, particularly
ASX200/ASX300 Australian Shares
US Total Market/S&P 500 Shares
All-World Ex-US Shares
What ETFs are available?
ING Direct have the largest range of available ETFs between the two products: ING ETFs
Particular ETFs available which I find attractive (but may not suit your particular situation) include:
| MER (fees) | ||
| Vanguard® Australian Shares Index ETF | VAS | 0.15% |
| Vanguard® US Total Market Shares Index ETF | VTS | 0.05% |
| Vanguard® All-World ex-US Shares Index ETF | VEU | 0.15% |
| Vanguard® MSCI Australian Small Companies Index ETF | VSO | 0.30% |
| iShares Russell 2000 ETF | IRU | 0.23% |
| iShares Core S&P Small-Cap ETF | IJR | 0.16% |
These provide even lower ongoing costs for Australian and International broad share indices as well as relatively inexpensive access to small Australian and US companies. The iShares MSCI Emerging Markets ETF (IEM) may also be appealing if one wants a higher exposure to Emerging Markets but comes at a relatively high Management Expense Ratio of 0.69%, unsurprising due to higher costs in general for investing in Emerging Markets.
AustralianSuper only currently provide access to iShares ETFs: iShares ETFs
Some examples which may be valuable include:
| MER (fees) | ||
| iShares MSCI Australia 200 | IOZ | 0.19% |
| iShares Core S&P 500 ETF | IVV | 0.07% |
| iShares MSCI EAFE ETF | IVE | 0.34% |
| iShares S&P/ASX Small Ordinaries | ISO | 0.55% |
| iShares Russell 2000 ETF | IRU | 0.23% |
| iShares Core S&P Small-Cap ETF | IJR | 0.16% |
Outside of the US small-cap segment, in particular for the broad Australian and International share indices these do not seem to provide as good value as the Vanguard funds available in the ING product. In particular, the Small Australian Companies fund seems fairly expensive at 0.55%. The same Emerging Markets fund is also available in AustralianSuper.
How Much Extra Does it Cost?
On top of the Management Expenses of the investments themselves, both ING Direct and AustralianSuper have additional administration fees to access these options. They both charge $180 p.a. as a basic fee. For AustralianSuper this also provides access to term deposits (which are available fee-free with ING Direct).
Additionally, brokerage is payable to purchase ETFs (or ASX shares). AustralianSuper have a sliding scale with a minimum of $15, then fees from 0.3% down to 0.12% for trades above $50,000. ING charge a minimum of $20 or 0.13% per trade. If not trading frequently, these fees are not vast but they may impede frequent portfolio rebalancing. One other trading cost to keep in mind is that some of the ETFs are not traded as frequently on the ASX and, as a result, have relatively wide bid-ask spreads. This means that the price you buy at may be a bit higher than the underlying value, and the price you sell at a bit lower. It's definitely worth keeping an eye on the bid-offer spread when making these trades and consider if the cost is worth it for the objective of the particular ETF investment.
What limitations are there?
Both products limit the extent to which you can use these options and the extent to which you can concentrate your holdings within individual ETFs or shares. The maximum in both cases is 80% of your total account balance in shares and ETFs, and 20% in a single share or ETF (although in the ING case that 20% may not be a strong constraint, for example you can combine a Vanguard ETF and a very similar iShares ETF). Both require a minimum total balance of $10,000 and also require a small amount be kept in a low interest transaction account to cover fees. AustralianSuper also requires a minimum balance of $5,000 in one of their own funds (some of which are good value nonetheless, as highlighted in part 1 of this series) and a minimum share or ETF buy order of $1,500. In addition AustralianSuper MemberDirect is not currently available to Pension members, only during the 'accumulation phase'.
I'm not an accountant and the tax treatment of capital gains for your shares and ETFs is somewhat unclear to me. Superannuation has the advantage of a 15% tax rate on capital gains (10% if held more than a year) and this certainly applies here. In a standard superannuation managed fund, the fund is marked-to-market (its current value is calculated) and my understanding is capital gains are distributed to holders of the fund as units are bought and sold. If I'm reading the AustralianSuper Member Guide correctly, it looks like capital gains are provisioned quarterly based on the gains and losses rather than on sale of your shares/ETFs. I haven't been able to find the detail on the ING CGT treatment. One advantage of a self-managed superannuation fund over these products may be that you can hang onto a share and only pay capital gains tax (or harvest capital losses) when you dispose of the shares. I'd greatly appreciate any feedback on the tax situation from readers more knowledgeable in this area.
Conclusion
Overall AustralianSuper MemberDirect and the ING Living Super Shares Option can be valuable for either diversification into specific asset classes or reduction of fees on larger balances. These have the potential for lower fees and administrative burden than a self-managed superannuation fund but are not without some limitations. For the purposes of ETFs, the ING offering does provide broader options. The AustralianSuper offering is probably best suited as a complementary investment for those who currently (or wish to) hold assets in AustralianSuper's other funds.
Other Superannuation funds are beginning to offer similar options, albeit less well-established and typically with fewer ETF options. It will be interesting to see how the marketplace evolves and the extent to which funds compete for those who want greater control over their super.
As always, feedback from readers is greatly appreciated.
Links:
ING Living Super Shares Option and List of ETFs
Additional Note: ING do not appear to offer comprehensive ASX 200 ETFs in their direct investment option any longer. This may reduce the usefulness of the option to some (while there are still similar options such as ASX 50 or high dividend yield index funds, or low-fee LICs such as AFI and ARG none of these are as well-diversified as the Vanguard® Australian Shares Index ETF)
Additional Note: ING do not appear to offer comprehensive ASX 200 ETFs in their direct investment option any longer. This may reduce the usefulness of the option to some (while there are still similar options such as ASX 50 or high dividend yield index funds, or low-fee LICs such as AFI and ARG none of these are as well-diversified as the Vanguard® Australian Shares Index ETF)
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