How to find the right ETF for your SMSF

Figure 1. The basic filter
 

Figure 2. The advanced filter
 

Further research

The ETF screener is a good tool to provide you with a shortlist for further research. Next, you should review each ETF to ensure you understand the underlying components, risks, and strategy of the fund. CommSec provides a range of data on the fund’s objectives, performance returns, and holdings. For more information, you can visit the ETF issuer’s website and have a look at the product fact sheets.

Liquidity

ETFs have an open-ended structure. This means that units of an ETF can be created or redeemed by “market makers” (unlike normal shares, which have a fixed number of shares on issue). Therefore, the market depth or liquidity of an ETF doesn’t relate directly to the units quoted in the “market depth” section of your broking screen. This ability to create and redeem units means ETFs are more liquid than they may appear. The liquidity of an ETF is mainly determined by the holdings of the fund.

Net Asset Value (NAV) 

The NAV is the estimated intra-day "fair value" of the ETF (which is the price per unit of the basket of underlying securities held by that particular ETF, less any liabilities such as management fees). This NAV figure updates multiple times per minute,  which means ETF prices are relatively transparent compared to unlisted managed funds (which are usually only priced once a day, at the end of the trading day).

The NAV for ETFs can be found on the CommSec website. Log in, go to Quotes & Research, and type in the relevant ASX code. In the fund’s Snapshot, you’ll find a section about Net Asset Value that looks like this:

Bid & offer spreads

Exchange traded funds are subject to bid and offer spreads. This is the difference between the NAV and the price at which the ETF can be bought or sold on the ASX. In general, the more liquid the security, the tighter the spread. Bid/offer spreads for all ETFs can be found on the CommSec website under Quotes & Research, Watchlists, or when placing a trade.

"Market orders" and "limit orders"

When you place an order through CommSec, you have the option of placing your trade as a "market order" or a “limit order”. A market order means you are agreeing to bid on whichever price the market is willing to pay, while a limit order means you can specify the price you are willing to bid.

The risk with a market order is that if there are many orders placed at the same time, your trade may be filled with the next best market bid (which may be worse than the best price possible).

To avoid this, you could place a limit order. With a limit order, you may run the risk of your order not being filled immediately, but you still avoid the risk of getting a price worse than what you wanted.

Best times to buy

Some investors avoid trading ETFs close to the market open and close. This is because the prices of the ETF’s underlying securities tend to fluctuate more at these times, and this may result in wider than normal spreads. This volatility occurs around the market close as the "matching period" approaches (all trades that take place when the market closes will transact at a price determined by the market, regardless of what price an investor bids or offers).

Active ETFs

SMSFs can invest in active ETFs as well as index ETFs (which are a form of passive investing). Active ETFs use various strategies to provide an active element in stock selection. They are more convenient to buy and sell compared to unlisted managed funds, because they’re listed on the ASX. And in many cases, they are cheaper.
 

The bottom line

The Australian ETF market continues to grow, and ETFs can offer real benefits in terms of cost and ease of diversification within your overall investment strategy. But before you invest in any fund, you still need to do your homework to ensure you understand the underlying components.