ETFs phone home: a stellar year for Smartshares

2015 was a bumper year for the development of Exchange Traded Funds (ETFs) in New Zealand. NZX Head of Funds Management Aaron Jenkins explains why ETFs are becoming valuable building blocks in investment portfolios.

Monday, February 8th 2016, 2:48PM

In the past year, Smartshares has expanded its ETFs portfolio from 5 ETFs focussed purely on New Zealand and Australian shares, to 23 globally diversified funds across the main investment asset classes of cash, bonds, shares and property. As the pioneer of ETFs in New Zealand, Smartshares is committed to developing a market that provides investors with a range of diverse, low-cost and easily accessible investment options.

NZX’s goal for Smartshares has been to develop building blocks that enable New Zealand investors to easily construct a personalised, low-cost, globally diversified portfolio.

With the new range of ETFs on offer, an investor can build their portfolio using New Zealand dollars, and benefit from the tax efficiency of the PIE regime that caps tax on distributions at 28%.

What is an ETF?

An ETF is a diversified portfolio of investments traded as units on an exchange. An ETF is an affordable way to gain diversified exposure to an asset class or investment style in a single transaction. Smartshares funds are listed on the NZX Main Board so investors can buy or sell them just like individual shares. Advisors can access Smartshares ETFs through various wrap platforms, for example Apteryx, Aegis and FNZ.

How do ETFs work?

Most ETFs are designed to track an index. For example, a 2% increase in the S&P/NZX 50 Portfolio index should result in a 2% increase (before fees and taxes) in the value of the holdings of the Smartshares New Zealand Top 50 Fund. It achieves this by buying securities in proportion to the composition of the index that it tracks.

Other ETFs include those that may be actively managed by an investment manager. For example, the Smartshares Global Bond Trust (GBF) is managed by PIMCO who aims to outperform rather than to track an index.

All Smartshares ETFs are open-ended funds, and have a market maker to support liquidity and ensure that the market price closely reflects the Net Asset Value (NAV) of the underlying investment portfolio.

Top 5 reasons to consider ETFs

Diversification – with one simple purchase investors can invest in a range of securities spreading investor risk more broadly and allowing investors to build diversified portfolios with smaller holdings
Lower costs – for the Smartshares ETFs the majority of funds are structured so Smartshares does not make active decisions that require investment in research, analytical and trading expertise, keeping costs low for investors relative to actively managed funds
Access – ETFs have opened access to a broad range of asset classes and markets. Smartshares ETFs cover a range of geographies, sectors and strategies giving investors the opportunity to build their own portfolios, with exposure to global equity and bond markets in the US, Europe, Australia and emerging markets using New Zealand dollars
Efficient – Smartshares ETFs are all registered PIE funds with tax capped at 28%, which compares to 33% for directly held securities. Smartshares ETFs avoid custody charges for holding offshore listed products and remove multiple foreign tax filings
Easy to continue contributing - If you participate in the regular savings plan for the Smartshares ETFs investments can be from as little as $50 a month once you have a minimum holding, and can be started or stopped at any time, with no transaction fees

Of course, like any investment there are also risks associated with investing in ETFs. You can read more about the risks and benefits of investing in the Smartshares ETFs by reading the investment statement for the relevant Smartshares Fund, which is available at smartshares.co.nz.

The perfect mix: fitting ETFs to your clients’ portfolios

Balanced portfolio

Advisors can now build low-cost, diversified and global portfolios in New Zealand dollars for all their clients through Smartshares ETFs. This includes smaller clients who have not traditionally had cost effective access to global markets and multiple asset classes. Because a globally diversified portfolio can be constructed simply using ETFs, benefits for advisors can include reduced administration time and compliance costs.

Example of how an ETF provides a balanced portfolio

Core satellite investing

A core satellite approach allows investors to get the best of both worlds using low cost index funds or ETFs as the portfolio’s core, and satellites of active funds or direct investments, which have the potential to outperform the market.

This approach reduces the reliance on picking outperforming investments or managers and increases diversification and tax benefits in some markets. It also has low funds management and trading costs.

Core satellite example:

Determine asset allocation – the weighting allocation to ETFs within each separate asset class will differ
Allocate index and active proportions – once ETF allocation is completed, identify active fund managers/direct investments

Get smart: make 2016 the year you add ETFs to your investing toolbox

2015 was a turning point in New Zealand’s ETF landscape. With the introduction of 16 new ETFs, New Zealand investors now have more flexibility than before to develop their own low-cost, globally diversified investment portfolios.

To learn more about how you could use Smartshares ETFs as investment building blocks for your clients, and for a copy of an investment statement contact us at smartshares@smartshares.co.nz or visit smartshares.co.nz

The information provided in this article is a guide only and intended for general information purposes. It does not constitute investment advice. None of Smartshares, NZX Limited, nor any other person associated with the offer of Smartshares units guarantees the return on the underlying index or guarantees a return on, or investment in, any Smartshares Fund.
Units in the Smartshares Funds have been accepted for quotation on the NZX Main Board by the Special Division of the NZ Markets Disciplinary Tribunal that regulates Smartshares. The NZX Main Board is a licensed market operated by NZX, a licensed market operator regulated under the Financial Markets Conduct Act 2013. However the Special Division accepts no responsibility for any statement in this advertisement.

Tags: ETFs NZX