If you are responsible for the investment decisions of a self-managed superannuation fund (SMSF), you may be in a situation where you have found yourself lacking somewhat in the skills required to manage your asset portfolio actively on a regular basis. Rather than stress over your predicament, there is an alternative to second-guessing the stock market.
Passive investments, as the name suggests, if selected carefully, provide a regular income stream without the constant intervention of the fund trustees. They can be concentrated in one asset class, but it is preferable that the fund portfolio is diversified to spread the risk in the event of a severe market correction.
Exchange Traded Funds (ETFs)
There are some passive investments that are especially favoured by SMSFs, but one that has continued to show remarkable growth over the past few years is the ETF or Exchange Traded Fund. All ETFs are listed on the stock exchange, allowing SMSFs to buy and sell the units when markets are open. They represent a portfolio of securities that track how a specific market index like the ASX 100 performs.
ETFs align with the goals of SMSFs in several areas, which is why they are popular with fund trustees who are looking for a long-term result, rather than getting involved in the hurly-burly of regular trading. ETFs offer a higher level of control over investment decisions, they reduce the costs incurred in regular, active investing, the investing process is simpler and more transparent and the tax outcome of the investments is also improved.
Listed ETFs also offer opportunities for SMSFs to access alternative income asset classes such as equity ETFs and fixed income ETFs. These both suit investors looking for a consistent income return, which is a perfect result for an SMSF. With equity ETFs, the dividend yield is the key criteria to look at when selecting the stock rather than the traditional method of market capitalisation.
Fixed income ETFs invest in debt securities where the returns are fixed at the time the bond is issued. They suit long-term investors who do not intend to trade and when held to maturity, market changes have no impact on returns.
Real estate offers some opportunities for passive investments suitable for SMSFs. Listed Property Trusts (LPTs) or Real Estate Investment Trusts (REITs) invest in commercial real estate such as office buildings, shopping centres, industrial premises, warehouses and the like. The tenants in these premises are usually on long-term leases offering consistency and predictability for SMSF trustees. These funds are managed by experienced professionals, so they are a good option for SMSF trustees with little knowledge of this asset class
With interest rates at record lows, the returns on cash in bank accounts are meagre. However, the up side is the security, and the immediate liquidity it offers. When interest rates do move upward, cash in the bank is the ultimate passive investment.
As with any type of investment, getting professional advice before making a move is always essential. If assistance is needed in the administration of the SMSF, there are always companies such as SMSF Assure available to advise the trustees and they make sure their administrative responsibilities are covered.