TRANSCRIPTION OF FINANCE NEWS NETWORK INTERVIEW WITH STATE STREET GLOBAL ADVISERS HEAD OF GLOBAL STRUCTURED PRODUCTS, SUSAN DARROCH
Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me for a look at Australian Exchange Traded Funds, or ETF’s, is Susan Darroch from State Street Global Advisers. Susan welcome to FNN. Many people in our audience have heard about ETF’s but that’s about all, can you briefly explain what they are?
Susan Darroch: Sure I can. ETF’s or Exchange Traded Funds, are just indexed funds which are listed on the Australian stock exchange. So they trade like any other share but with an ETF when you make one transaction, one purchase, you’re buying a broad diversified portfolio.
Clive Tompkins: So how long have they been available here and what’s the take-up?
Susan Darroch: We introduced the ETF’s, the SPDR ETF’s, in 2001. The first ETF’s we introduced was the SPDR 50 which is basically the top 50 stocks in the Australian exchange, and the SPDR 200 which is a broader Australian index. In 2002 we introduced the Listed Property Trust ETF, so that is based on the listed property trust sector. The take-up of ETF’S initially was very much focused on the institutional market, they’re the ones who understood what ETF’s were and so they were the initial group who took those ETF’s up. But over the last 12 to 24 months the usage of them has really expanded into the retail market, the self managed super fund market, and into the financial planner market.
Clive Tompkins: Ok Susan, so how much is under management and what’s the daily turnover?
Susan Darroch: Currently we have Australian over $2 billion under management in the three ETF’s. The turnover on the stock exchange is around about Australian $15 million a day and that puts the ETF’s in the top 50 stocks in terms of turnover on the ASX.
Clive Tompkins: So how do you suggest ETF’s be used, as a replacement for managed funds? Or to compliment a portfolio?
Susan Darroch: ETF’s can be used in a number of different ways. And it really does depend on the portfolio that you’re investing in and what you’re trying to achieve. So the ETF could be used as a replacement or to compliment managed funds. One of the most popular uses of ETF’s is to use the ETF, say the SPDR 200 as the core or the basis of a portfolio where you’ve got the biggest 200 stocks in the Australian Stock Exchange. And so you know that you’re going to get the performance of those 200 stocks then if you want to add other managed portfolio’s around that to gain extra return or if you want to add different stocks that are not included in the 200 again to add return to your portfolio then you can add those to your core portfolio.
Clive Tompkins: And are ETF’s being used in any other way?
Susan Darroch: Because of the low cost and tax efficiency of ETF’s, investment banks often use ETF’s in their structured products, so an installment warrant over the SPDR 200. Also the ANZ has put together a product where you can actually access exposure to ETF’s through your savings account.
Clive Tompkins: Given there is no active management of the stocks in the funds other than when index components are changed, what are people buying?
Susan Darroch: People are buying exposure to the market in the case of the SPDR 200, or a sector with the SPDR Listed Property ETF. They’re also buying a product that has very low management fees. Retail investors normally wouldn’t be able to get management fees as low as the ETF offers. The other thing that is a positive for ETF’s when people invest in them is that they are very tax efficient. When someone redeems from the ETF the realised capital gains component goes with them, the liability is not left with the remaining unit holders which is a great advantage.
Clive Tompkins: Do they receive dividends on the underlying stocks? And when?
Susan Darroch: Yes you do receive dividends and you also receive franking credits. Dividends are paid out when the funds distribute. For the SPDR 50 and SPDR 200 that’s semi-annually. And for the Listed Property ETF that’s on a quarterly basis.
Clive Tompkins: So what are your annual fees?
Susan Darroch: Annual fees for the SPDR 50 and the SPDR 200 are 0.286 per cent per annum, and for the listed Property ETF they’re 0.4 per cent.
Clive Tompkins: And are ETF’s eligible for margin lending?
Susan Darroch: Yes they are. Investors should check with their margin lenders to make sure that they are on the approved list however.
Clive Tompkins: For someone watching this broadcast that wants to invest, how do they apply? Do they go through a broker or a planner or can they apply directly?
Susan Darroch: They can’t apply directly it’s not like a managed fund. So they have to either go through a broker, so if they have a broker account set-up then they can go through their broker and buy on the ASX, if they have a financial planner then they can also get exposure that way.
Clive Tompkins: ETF’s number in the hundreds in the U.S. Do you have plans to broaden your offering in Australia?
Susan Darroch: SSgA is always keeping up with market demands and if market’s show that there is a need for another ETF in a different sector or investment strategy then we would be more than happy to introduce one. At the moment we seem to have the appropriate mix for what the demands are.
Clive Tompkins: Last question. Could we see ETF’s over other asset classes for example government bonds?
Susan Darroch: The global experience is that with support and popularity of ETF’s and continued support and popularity of ETF’s it does actually become easier to introduce new ETF’s to the market for instance over other asset classes other than equities like in bonds. So with the continued growth and support of ETF’s in Australia, we do see that more specialised ETF’s could be introduced to our market.
Clive Tompkins: Susan Darroch thanks for coming in and introducing ETF’s.
Susan Darroch: Thank you.
