Tax settings tweak could help grow local ETFs

A review of tax settings for different fund structures alongside a maturing market approach to portfolio builds could help support the growth of New Zealand’s local ETF market, says Smart CEO Anna Scott.

Tuesday, December 10th 2024, 9:10AM

by Kim Savage

Exchange traded funds have soared in popularity globally, largely driven by retail investor uptake in the US, with platforms such as Robinhood offering zero commission. Advisors Good Returns spoke to say despite the number of choices on the market both locally and globally, ETFs remain expensive for New Zealand investors and they are rarely the most tax efficient option to achieve the desired exposure.

NZX-owned investment manager Smart recently expanded its suite of ETFs to 44, offering access to both New Zealand-only ETFs, offshore ETFs and bundled products. Smart’s ETFs are treated as PIEs and taxed at 28%, although chief executive Anna Scott says it is not a perfect arrangement.

“We've looked at some of the tax treatments versus an unlisted product in the inner workings of the fund, and they're not apples with apples treatment by the IRD in some cases.

“So we are saying if you do want to see growth in some of these markets, you've got to level the tax treatment tools that you've got available in terms of running the different structures of funds.”

The growth of offshore ETFs has been seeded, in part, by the tax advantage ETFs offer but New Zealand doesn’t have the same settings, says Scott.

“The tax structure that we have around funds is deemed to be an advantage already, but there are some discrepancies between the listed version and unlisted, and likely it comes down to timing.

“To an average retail investor, it’s probably not that major but to a fund manager, when we look at running both of those products, there are some things that we think could probably do with a little bit of adjustment,” says Scott.

Value proposition top of mind for Smart

Unless tax settings change, the investment manager continues to focus on its value proposition and helping investors understand the tax implications of their decision-making.

“It is really hard to give one uniform tax position, and so we're trying to break that down to kind of use cases of people to make it more relatable.”

“For a long time, people have said if you go into an unlisted at a lower tax rate, say zero or 17 and a half, you can have your final tax paid at your PIR and that's true. With an ETF you can get it back, but it is more of a hassle.

Anna Scott says understanding who the company’s ideal clients are will help them focus their education efforts in the right direction.

“I totally get it - if you're a charity, you'd rather have the final tax paid at 0% because it works for you, so that's not a clean target market for our ETFs.

“But if you're a general retail investor, and a lot of people who have an advisor are already above 28% tax rate anyway. So the fact is there's no difference at that level.”

Kiwis’ tastes will mature as time goes on

It isn’t just tax efficiency holding ETFs back, says Anna Scott, but also the rate the market is maturing.

While financial literacy has come a long way thanks to KiwiSaver, Scott likens Kiwis’ investment journey to the evolution of the coffee order.

“When we think about where we are at, we are just off black, white, decaf, right?

“Because even in our fund experience, people are getting used to investing, but they still will buy a balanced or a growth or a conservative fund, or do their own stock selection.

“If you go to Australia, or even the US, people aren't in multi asset funds because they've grown out of black decaf, right? They still have a balanced portfolio, but they’ve bought it at the next level of sophistication. They get the US 500, an emerging market, Japan, gold and I have Australia.”

Scott says as investors mature, advisors will better understand the benefit of their advice is in asset allocation rather than stock selection so they can start to use ETF tools to mix and match for clients.

“You get more sophisticated and choose whether you want the almond milk or the dairy, and that's just a journey. And so I think that that same journey is what opens up the ETF market as well.”

Tags: Smart