How does InvestSMART choose its ETFs for their portfolios?

Hi Team, with so many choices of ETF's out there to choose from, I'm curious how InvestSMART selected the ETFs currently used within the diversified portfolios, and why they were selected over other similar ETFs? Is this something you could write an article on or cover in one of your From the Bunker webinars? For example, Stockspot published an article a few months ago comparing various ETFs and explaining why they chose some over others to include in their portfolios, such as selecting IOO rather than VGS, or VAS rather than IOZ. I would be interested in hearing from the InvestSMART team on your views and methodology for selecting ETFs. Cheers. - Submitted by Aaron

Hi Aaron

This is a fantastic question and one that we get regularly  

We choose our ETFs based on several factors the main ones being:

• Market Capitalisation/Funds Under Management (FUM)
• Lowest fees, known as the Management Expense Ratio (MER)
• As close a replication of the underlying market as possible
• Price Per Unit

Let’s take the example of IOZ - iShares Core S&P/ ASX 200 ETF which we use in our diversified portfolios as our domestic holding.

There are 4 listed ETF that replicate the ASX 200 - however QOZ has an additional mandate therefore it is excluded as it doesn’t meet the needs of the portfolios.

If, we then look at Funds Under Management (FUM), STW has the highest FUM however it is also the most expensive with a MER at 0.13%.

IOZ has the next highest FUM at $3.6 billion and with a MER of 0.09% it is cheaper than STW.

A200 at $1.13 billion is certainly a level of FUM that gives us confidence in its liquidity, it also is the cheapest at 0.07%. However, its price per unit is very expensive. At $110.87 our ability to buy enough units to meet each portfolio’s required risk weighing is very constrained when compared to IOZ’s price per unit of $27.08 which does allow us to weight each portfolio more easily.

That is why when taking all these factors together we selected IOZ as our domestic equity exposure.

However please be aware that we are constantly reviewing our holdings, if for example A200’s unit price was to be reweighted to $30 for example we would certainly consider changing.