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3. ETFs For Beginners – Managing Your Portfolio w/ BetaShares

HOSTS Alec Renehan & Bryce Leske|19 October, 2020

Sponsored by BetaShares

ETFs For Beginners with BetaShares is a series to help you understand everything you need to know about ETFs when you’re starting your investing journey. Over 3 episodes we unpack all the kay elements from the basics, through to the administration after you buy.

In this episode we sit down with Alistair Mills from BetaShares, to discuss all the aspects you need to know about managing your portfolio of ETFs. We cover:

  • Some of the key considerations individual investors must factor in when building a portfolio
  • Diversification, and the different types an investor should be aware of
  • ETF overlap
  • How many ETFs is too many
  • Share registries and why they are so important
  • Dividends and distributions
  • How to know when to sell
  • Plus, much more!

This series is also available to watch on YouTube.

BetaShares is a leading manager of ETFs and other Funds traded on the Australian Securities Exchange (ASX). Founded in 2009, their aim is to provide intelligent investment solutions to help Australian investors meet their financial objectives.

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Bryce: [00:01:12] Welcome to Get Started Investing ETF Deep Dive. In this bonus series, we're going to explore everything there is to know about exchange traded funds or ETFs so that you can feel confident to use them in your investing journey. This series is proudly supported by beta shares and we've brought in some of their experts to break it all down for you. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going, bro? [00:01:34][22.3]

Alec: [00:01:34] I'm very good. Bryce very excited for this third part of our three part series on ETFs. We've Covid what an ETF is. Yes, all the basics you need to know. Then we got stuck into some of your options. And the big takeaway from that is the options. [00:01:48][13.7]

Speaker 4: [00:01:49] There's a lot they're [00:01:50][1.4]

Alec: [00:01:50] not unlimited, but they're pretty bloody close. This third one, I think, is probably the most important. I'm speaking personally, the one that I need to learn most about. So I'm very excited for this. [00:02:01][10.7]

Alec: [00:02:03] ETF journey doesn't stop when you buy that first ETF. There's you know, you've got to think about what you're building in terms of a portfolio. And then there's some management steps that you've got to keep in mind and keep doing. So I'm excited for this one because I think I'm going to learn a thing or two along with everyone else. [00:02:19][16.0]

Bryce: [00:02:20] Likewise, Ren. And it is our delight to welcome Alistair Mills from Beta Shares. Alistair, welcome to the show, gents. [00:02:26][6.3]

Alistair: [00:02:26] Thanks for having me on. [00:02:27][0.5]

Bryce: [00:02:27] So, Alistair, before we get started into, as Ren said, sort of building your portfolio, using ETFs and then some of the I guess the admin side of things, that is boring but important, really important to know. We love to hear firstly what you do it better shares, but also your first investment. What's the story, successful or not? That Grindin makes me think it's a good story. [00:02:49][21.5]

Alistair: [00:02:50] It's my my role. At BETA shares. I look after the institutional side of things. So your asset managers, super funds, insurers who are starting to use ETFs more and more. So we're looking to expand that out. I also do a lot of our portfolio analytics, so advisors, professional investors who are looking to look at their asset allocation or securities selection, and we've got capabilities to help them. So I do a lot of a lot of that side of things as well. [00:03:17][27.3]

Bryce: [00:03:18] We can use all that knowledge to help. [00:03:19][1.3]

Alistair: [00:03:21] In terms of my first investment, it's actually a bit of a boring lot as far as having worked in ETFs for the vast majority of my sort of investment time frame ETFs have really formed the basis of my portfolio since then and coming to Australia as well, where everyone loves some specky. [00:03:38][16.7]

Speaker 4: [00:03:38] Yes, things have actually got a little bit louder on the side. [00:03:43][5.0]

Alistair: [00:03:44] And with that, some of my portfolio returns have actually deteriorated because [00:03:48][3.7]

Speaker 4: [00:03:48] it's a shocking cause. [00:03:49][0.8]

Alistair: [00:03:49] But best investment. Yeah, being quite young when I did it was pretty focussed on the technology side. So the Nasdaq 100 and that's served me pretty well actually. As a kid, you [00:03:59][9.9]

Bryce: [00:04:00] can't go [00:04:00][0.3]

Alec: [00:04:00] wrong. That's a very sensible first investment and. [00:04:03][2.5]

Speaker 4: [00:04:03] Yeah, yeah, that's right. Yeah. [00:04:04][1.5]

Alec: [00:04:06] I lost ninety nine percent of my money on my first investment. So I'm envious of your first investment. [00:04:11][5.3]

Alistair: [00:04:13] That was the first one that I bought. Bought plenty of stuff. That's last week, plenty of money, my physical assets. But now investment wise it was. Yeah. Reasonably sensible and boring I suppose. [00:04:22][9.7]

Alec: [00:04:24] Nothing wrong with that. No, nothing wrong at all. So I guess we want to break this episode into two separate parts, the first part around building a portfolio and then the second part around managing your portfolio. So if we start with building your portfolio and we start quite broad, I guess, what are some of the key consideration individual investors should be thinking about or factoring in when they're building a portfolio? [00:04:45][21.8]

Alistair: [00:04:46] Yeah, some of the most important things are really knowing what type of investor you you are. So probably the most importantly time frame. How long have you got? And that's really going to determine how much risk you can take if. You're a retiree and you lose 99 percent of your money, you might not necessarily have the time to make it back, whereas if you're 18, you've got years and years and years. If you look at returns on a chart and stretch them out, that volatility becomes a smaller component, really. So time frames such an important thing. The longer you've got, the better that builds into what your risk tolerance is. And that's going to determine what you invest in. If you lower, lower risk, you're going to be in more defensive assets, probably more bonds, more cash. If you're high risk and you've got longer, you can take some take some riskier investments. That that's a huge one and then probably fine. How much time do you actually want to spend managing your portfolio as a good. [00:05:43][56.3]

Alec: [00:05:43] That's a really big one. [00:05:44][0.6]

Alistair: [00:05:44] You can actually build a really good portfolio just with a few ETFs that's going to serve you really well. You don't have to look at it quite as much as if you're picking individual stocks or getting really detailed with it. How much interest have you got? How much time do you want to spend? Another one? [00:06:00][15.6]

Bryce: [00:06:01] Three really sort of simple things to understand something that is often poorly understood is the term diversification. And that's another key consideration when building a portfolio. What are some of the different types of diversification that an investor sort of should be aware of when building their portfolio? [00:06:20][18.7]

Alistair: [00:06:21] Diversification holistically is just having a broad range of different things that perform differently at different times, because if it's a bit cliche, check all your eggs in one basket. If they go up, everything goes up and down, vice versa. So you can break diversification down into different levels. The first ones probably are asset classes. So equities, bonds, commodities may be within there. You could split domestic or international getting further down, you know, individual regions mixing just Australian equities with or U.S. equities. But a Europe, Japan, break it down and then sectors as well. Australia's got very heavy tilt to banks and resources. So you might diversify into technology, which you can get through something like said the Nasdaq before US stocks or some specific sectors within Australia. And then finally, you've got the individual securities as well. I mean, you could either hold one stock and just hold Apple for your technology exposure or you could hold 100 of them, and that's going to diversify further. [00:07:24][63.3]

Bryce: [00:07:24] So just on that point, you're you know, you're a beginner investor and you've just bought your first ETF, which are sort of touted as a good way to diversify. And you're thinking about building a portfolio of ETFs you've bought, say, 200, which follows the top 200 stocks in Australia. Is that enough sort of diversification? Should if you just keep buying more and more of that, like, how do you think about diversifying that way? [00:07:49][24.4]

Alistair: [00:07:49] Yeah, it's going to be a good starting point. And compared to a lot of portfolios where people have got five stocks or 10 stocks, definitely going to be more diversified there. If you are building up your wealth and adding it continually, there is definitely benefits to being more diversified than just Australian equities. If you compare charts of, you know, the US, whether it's the S&P 500 compared to Australia, again, they perform well at different times because of their make up. So one ETF isn't necessarily going to give you the proper asset allocation. And that's that's the key part of diversification. And building a really good portfolio is decent asset allocation across those broad asset classes. So if you can add more ETFs to that, it's going to benefit you. There are actually some ETFs which are almost like an ETF of ETFs, that that's a really good start, that the most simple way to invest and proper properly diversify by one of those. You've got Australian equities, international equities, some cash, some bonds. That's a one stop shop. [00:08:49][60.1]

Bryce: [00:08:50] Yeah. Does the shares have an ETF? [00:08:51][1.4]

Speaker 4: [00:08:52] Yes, we do. We've got we've got four. [00:08:54][2.2]

Alistair: [00:08:54] They're actually at the moment ranging on risk profiles, high growth growth, balanced and then more conservative. [00:09:00][5.9]

Bryce: [00:09:01] That is that high growth. Yeah, yeah. I mean on that, it's not [00:09:07][5.7]

Speaker 4: [00:09:07] growing but others are growing. [00:09:11][4.4]

Alec: [00:09:12] Just so on, diversification. One thing that I guess investors should be aware of is around ETF overlap because some people might think they're diversified, but they're perhaps not as diversified as they think. So I guess a good example of that is if you invest in the a two hundred ETF and you have the top two hundred Australian stocks, and then you also invest in a tech, you've got three different ETFs, but their holdings will overlap. So how do you think about ETF overlap and how do you think investors should be? What should they be factoring it into when they're building a portfolio? [00:09:48][36.4]

Alistair: [00:09:49] Yeah, I mean, one of the key benefits of an ETF is how transparent it is. You can say all the regions in there see the sectors, see the individual holdings, all of that weight within the portfolio. So. That's a good example, I mean, Australia is a broad market whilst it's 200 stocks, is actually very heavily concentrated to the top end. The biggest stocks have a higher weight. So, you know, your big four banks and the top 50 stocks of almost all of you retain drivers whilst Australian technology is still within that. If you actually look at the individual portfolio holdings, you can see whether you've got big overlap. And Afterpay is a very heavy component in a tech or the Australian technology index, and it's actually creeping its way up in other indices. But if you actually look at all the individual holdings, you can see whether there's overlap there, you know, something like two technology exposures. So the Nasdaq, which has a heavy technology tilt and a cyber security ETF, whilst you may think that both technology stocks, if you actually break it down, there's not necessarily that much overlap. But that's not to say that it's still going to diversify across sectors. They're both going to give you more of an update to technology. So these are important considerations. [00:11:02][73.3]

Alec: [00:11:03] I like that way of thinking about it in terms of what drives the returns and what's the weighting in the ATF, because to that point, like an overlap in and of itself isn't a problem. You know, the end AQ, the Nasdaq ETF is just so driven by those top five or six technology stocks that even if it has a cyber security, is stockers number 98 on the list, it's not a meaningful overlap. And then if you think cyber security is a good investment separately. So I guess in terms of people doing that work and figuring out is there an overlap, but also like what is the size of the overlap? Where can they go and find that information around what's in each fund? [00:11:40][37.2]

Alistair: [00:11:41] Yeah, if you go on the website, go on fanpage, they'll all have a download where you can download an Excel spreadsheet, which will have all of the holdings individually and their percentages next to them. If you're looking at a couple of ETFs, download those two things and you can just bang them together. And you could say if you've got a 10 percent weighting to Apple in one and 10 percent in the other. Yeah. Think about whether you need to ETFs or one's going to do the same job because the more ETFs you have, if it's not actually adding sort of a return profile, all you're doing is paying more brokerage, probably paying your accountant more because you've got another line in your portfolio. So don't necessarily buy to when one will do. But most of the ETFs across the market have been designed to be different. You know, Adam spoken to you on a previous episode, but there are loads and loads of different ETFs. But here in Australia, we've only got two hundred, two hundred and fifty or so. So there's still each one's doing quite separate job. There's so many different in the US. I mean, there's thousands and [00:12:41][60.0]

Speaker 4: [00:12:41] thousands and [00:12:42][0.7]

Alistair: [00:12:42] there are going to be very, very similar ETFs out there. [00:12:44][2.3]

Bryce: [00:12:45] Let's flip it the other way. The top tech stocks in the states at the moment make up something, you know, ridiculous. Twenty six percent of the total S&P 500, which is just a phenomenal figure, given that those very concentrated amount of stocks will really be driving the overall performance of the index, why wouldn't you just go out and buy all five of those stocks and just let them go? [00:13:06][20.8]

Alistair: [00:13:07] If you look at how that's changed over time, it hasn't always been been that way. And it is it's obviously quite a big thing at the moment. And there's a lot in the news you read about that, how concentrated the indices are becoming. But look at the market. Twenty years ago, thirty years ago, fifty years ago, the top ten stocks weren't the same stocks as they are now. So if you just take a stamp in time by those ten, I mean, who's going to say that they're going to be the best, biggest companies in the world? I mean, look at Tesla wasn't sort of anywhere near where there still is. You'd still be holding things up. Coca-Cola and Exxon is yet as your main ones, which have slightly fallen down the ranks. So holding an index, which is market cap weighted and that allows you winners to drive through and drive your returns. And it does keep you diversified, even though you've got quite a small tail. It enables the winners to work their way up and you get that sort of natural selection, so to speak, as opposed to just holding ten and hoping for the best. [00:14:04][57.7]

Bryce: [00:14:05] That's something that we actually haven't touched on in the previous two episodes, is that the underlying holdings do change. Why do they change and how do they change? And obviously, is this something when you're managing your portfolio that you need to be aware of [00:14:18][12.6]

Alistair: [00:14:18] does depend on the index methodology really. And what they'll have is so the ASX 200, the 200 stocks, the very bottom of the market, and you'd have like Tik-tok. Two hundred and two hundred and one. These index often rebalance quarterly and they'll look at the size of the company number of shares. If you were just swapping them in and out, you'd have a lot of turnover. You'd be swapping between 199. [00:14:39][20.6]

Speaker 4: [00:14:42] So you go back to Norfolk or Norwich, that's always in our Sunderland [00:14:48][6.9]

Alistair: [00:14:50] down a bit. So you have what's known as buffering and it does stop that turnover. But it is it is important as companies grow that they are representing. In the index, because indices when they were first in, there were a way of measuring the market. Yeah. And as a way of measuring the top 200, top 100. And I said that's going to change over time and you've got to let those newer companies build. Zoom's a really good example of the Nasdaq 100 that they've just become so instrumental in what so many people do for work. That was nowhere near the top 100, you know, six months ago or a year ago, sometimes gone very fast. [00:15:23][33.3]

Speaker 4: [00:15:25] Set my house like [00:15:26][1.1]

Alistair: [00:15:28] a year ago. And that just forced its way into the top and is now a really representative of how people are doing business and interacting with one another and is getting represented in those indices. [00:15:40][11.6]

Alec: [00:15:40] So but for individual investors, when an index rebalances and when an ETF rebalances, they don't have to do anything or there's no tax implications or anything like that. You guys handle all that for us. [00:15:51][10.9]

Alistair: [00:15:52] We handle that. The tax implications are passed on to investors. So if you think of a fund or an ETF, like we're going to be at the top marginal tax bracket. So any capital gains that are through, say, rebalances and creation's and redemptions, which can get streamed out but do do have an effect or distributions, you as the individual are taxed at your marginal tax bracket. So it's not all done at a fund level. One thing that does get taken into consideration is if you look at where you are in international ETFs are domiciled. So if you buy just a US listed ETF that's holding European stocks, you've got to pay tax on the US investment that you've made and they're paying tax on the European investments that they've made. Whereas if you just buy an Australian domiciled, you know, us fund it. It's just one layer of tax. And you don't have to worry about doing your own band forms and you fill that out to stop yourself paying double tax. Whereas if it's an Australian fund or an Australian domiciled fund you're investing in, that's done at the fund level. So just makes your life a lot easier, avoiding necessarily paying twice as much tax. [00:17:01][69.3]

Alec: [00:17:03] If we recap on building a portfolio and then we move to managing a portfolio for an individual investor, there's a number of considerations that they need their time horizon, their risk appetite, and that those two things feed into the strategy, I guess. And then from there, things around diversification for asset allocation. And then the final one, which I thought was really good and one that we haven't really touched on much, is then your ability or your desire to actually spend the time doing the work. And it's funny, I was just when you said that I was thinking about some of the interviews we've done, you know, we've had everyone from someone who believes all you need to buy one ETF and MSCI All World Index. You buy it for 40 years and you're all good to people that spend, you know, 14 hours a day studying individual stocks is just such a range of different, I guess, appetites to spend time. But the long and the short of it is there's no one right way. Whatever your appetite is, is your appetite. And I guess ETFs give that whole range of people an opportunity to benefit from the stock market. [00:18:07][64.6]

Alistair: [00:18:08] A hundred percent like it just really depends on your interest as much as anything and how much time you've got. You know, people dedicate their lives to being professional investors and they're like their skill set is researching all of these individual companies. Then you've got others which their skill sets sort of building the portfolios and they might use ETFs to do that. You've got ETFs which hold thousands of stocks. You've got some 30 stocks, and they can be used to make more tactical to be a lot more active in your portfolio compared to like a really broad market ETF like the MSCI World. You said it's got about 500 stocks, makes it makes it a bit simpler. [00:18:44][36.4]

Bryce: [00:18:45] So let's move to managing your portfolio, something that is particularly important, but sometimes often overlooked or misunderstood. Here at Equity Mates, we have two key policies. We hate fees and we hate jargon. Fast, though, going to be adding a third, which is we hate share registry paperwork. [00:19:04][19.0]

Speaker 4: [00:19:07] They send out so many damn letters, every trade you do, every decision you [00:19:11][4.3]

Bryce: [00:19:11] make, Ledda, Ledda. So look someone out there who wants to disrupt the share registry business copywrite. We're going to do it. For those of our listeners who have no idea what I'm talking about. Share registries. Let's just start with the basics. What are they. [00:19:27][15.8]

Alistair: [00:19:28] Yeah, so they apply when whether you're buying individual stocks or ETFs because you buy an ETF on the exchange. So you're not buying directly from the ETF provider shares. There's a share registry that looks after your holder information because you're buying a fund. You buy units within that fund. They look after your details, they look after your tax statements. So send your letters on distributions and they keep your information there. So they they do a lot of the administration communication on our behalf to individual investors. Like you say, send send out lots of yes. [00:20:04][36.1]

Speaker 4: [00:20:05] Saves you. But really, I mean, come on, we're calling it like I get them as well. [00:20:11][5.9]

Alistair: [00:20:11] And yeah, you go you go paperless. Most of them seem to. Yeah, you do still get a lot of paper. So it's something that could. [00:20:19][7.9]

Bryce: [00:20:20] So for example, let's just take a practical situation. When I buy a stock, better shares will communicate with the registry that I've bought that stock rather than you send me a letter saying, you know, here's your chance and HCN and here's how many units the registry would do that. Send it to me to actually need to keep that paperwork. [00:20:36][15.9]

Alistair: [00:20:36] Most of it will will be stored. It's I wouldn't recommend you just throw it in the bin. [00:20:41][4.5]

Speaker 4: [00:20:41] It's pretty sure that I do. Not at all. [00:20:44][2.9]

Alistair: [00:20:46] Nowadays, it should all be kept like a system, but just in emergencies. If you lose your hard drive, [00:20:52][6.6]

Speaker 4: [00:20:53] the cloud, the cloud is so [00:20:54][1.3]

Alec: [00:20:55] big in defence of share registries before online brokerage was the thing. Yeah. [00:21:00][5.1]

Speaker 4: [00:21:01] So critical. [00:21:02][0.6]

Bryce: [00:21:04] They still do serve a critical purpose. And I'm just having a bit of fun [00:21:07][3.4]

Speaker 4: [00:21:08] out of letters that that said. So let's just [00:21:11][2.4]

Bryce: [00:21:11] recap. So they're the sort of middle man that you said holds information and that sort of stuff. Is there anything that an individual investor needs to do or understand? You know, they've bought an ETF. Then what? [00:21:22][10.7]

Alistair: [00:21:22] Yeah. So when you buy an ETF and you try to settle through your brokerage, you'll get a welcome letter that will come through and you'll have your HCN. You should log into the share registry when when you do that. And different ETFs or different providers will use different registries as saying individual stocks, whether it's like market services, Computershare or others, you log in with your HQ and you post and your provider that'll show you what you've got from there. Probably the most important just starting point would be check your bank details and correct on that. If you are receiving dividends, make sure it's going into the account you want. It doesn't disappear, but it will be held with as opposed to. Going with you and you'll wonder what why it's not there again, with dividends, you can you can elect to do a dividend reinvestment plan could drop. So if you're an accumulator, you're worried you're getting paid a salary paid to work. You don't need dividends to pay your bills so you can automatically reinvest those dividends. And now we'll do that automatically. And it will save up until you've got enough to buy a unit or might already be multiple automatically reinvest. Saves you brokerage just goes straight back into the fund and you'll hold more units. So that's a really important consideration, particularly for people who are looking to accumulate wealth and then finally, let all your tax statements are on their side. You just download a PDF when you're doing your tax return or speaking to your accountant. And that's all that's all kept on there. [00:22:51][88.8]

Alec: [00:22:52] So dividend reinvestment plans are something that a lot of people have questions around, especially with ETFs. I think for for that exact point, they want to just keep accumulating while they're younger. So they're all better shares. ETFs offer the ability to do dividend reinvestment plans. [00:23:07][15.0]

Alistair: [00:23:07] Yes. So some of them you can actually decide what percentage you want to do. It's not necessarily just an on or off, but keeping it simple. Yes. That you can do it on across all of them makes it really easy. [00:23:18][11.0]

Alec: [00:23:19] And a common question people have is, let's say a two hundred unit price is around one hundred dollars at the moment. Let's say IRA save twenty five bucks in dividends. But I've elected to participate in the dividend reinvestment plan. How does that work yet. [00:23:34][15.2]

Alistair: [00:23:34] So that that'll be held in an account like the account on our behalf and that's all pulled together until you've got enough cash to buy a whole unit. So you've made four distributions, let's say, to get that 100 dollar unit. Until then, it's just satyrs cash. One thing to bear in mind, sort of later down the track. But if you were to sell that ETF before you had enough cash to buy a dividend, you sometimes need to let the provider know so that you actually get that that leftover cash [00:24:03][29.1]

Alec: [00:24:04] and the process of letting the provider know is finding your personal email and sending it to you. [00:24:10][5.7]

Speaker 4: [00:24:13] That is that that's [00:24:14][0.8]

Alec: [00:24:14] where the share registry comes in. [00:24:16][1.2]

Alistair: [00:24:16] So they can manage that as well. [00:24:17][1.0]

Bryce: [00:24:18] Yeah, super critical, I think is very important to understand and something that, you know, you can from all the way through. But and we haven't often spoken about it much on Equity Mates podcast. But to your point, Alistar, you may find that you do have multiple logins for multiple share registries, depending on what you're buying, individual stocks, different providers for ETFs. I think if you're not going to keep your letters, at least keep your login details for you share registries, because it is crucial to manage your actual underlying sort of admin for you, for the stocks that you're holding. If you want to change from dividend reinvestment to actually getting the cash when you finally make it to 60 and you need those dividends, if you can't log in, [00:24:55][37.7]

Speaker 4: [00:24:56] you're going to be 100 percent. [00:24:58][2.5]

Bryce: [00:24:59] So, yeah, nice to touch on that because as I said, we haven't done that before. So let's just move to one more question about dividends, franking credits and other sort of love of Australians [00:25:11][11.7]

Speaker 4: [00:25:12] for good reason. [00:25:12][0.4]

Bryce: [00:25:13] And but again, something that is often sort of overlooked or confusing or maybe not important as a beginner investor, but just sort of generally speaking, what are franking credits and why should it matter? [00:25:22][8.9]

Alistair: [00:25:23] Yeah. So franking credits these days are quite, quite an Australian centric, earning a lot more a lot more countries used to do it and have slightly pulled it back. So what happened when Australia tried to do that? [00:25:34][10.4]

Speaker 4: [00:25:35] Not in terms of franking credits. [00:25:37][1.7]

Alec: [00:25:37] Just stop paying people money for the franking credits. [00:25:40][2.8]

Alistair: [00:25:43] Yeah, interesting. Interesting period. So a franking credits franking here, imputation credit in its simplest form just stops you paying double tax on dividends. So an Australian based company, if they're earning revenue in Australia, they're already paying tax on that. It stops you paying tax on top of tax, already paid that you can get right down into it. Now, that's great, [00:26:06][23.4]

Bryce: [00:26:06] because how do you know if your dividends are franked? [00:26:10][3.4]

Alistair: [00:26:11] So it will say on the fund, on the fund page, whether they're franked. And part of that distributions statement will give an estimate. The ASX website also has some good franking information. If you look in the dividend section for every distribution, gives you an estimate, it's only applicable at the end of the tax year. You don't get franking credits each month or quarter. It will be as 30th of June approaches. And you need to not everything is right. International equities are going to be franked. Obviously, not 100 per percent of Australian equities are franked if all of their business is off offshore bonds cash. So it's really simple. And you'll see on the on the fund page, on the website, you'll see what percentage is franked and whether whether they're actually eligible. [00:26:54][43.0]

Alec: [00:26:55] Let's use a two hundred as an example. They pay a distribution and that's really a roll up of all the companies that are. In that funds dividend, and so it's the same with franking credits, whatever those underlying companies pay in terms of franking credits gets passed through to the ETF holder. [00:27:10][15.9]

Alistair: [00:27:11] Yeah, so the fund is invested in all of these individual companies, obviously receives all of the dividends and the associated franking, as you would if you're an investor, buying the individual securities. And then all of those are distributed equally to to the investors that hold it over the state. [00:27:29][17.4]

Alec: [00:27:29] And then if people aren't sure of what the franking credit amount is or anything like that, again, is it go to the share registry, you can get all that data. [00:27:37][7.5]

Alistair: [00:27:37] Yeah. So the first place you go, just go on to the fund web page, have a look through the announcements or just have a look through ASX announcements and it will give you a breakdown. Other than that, yeah, the share registry is really good. Just find your distribution statements and that that will give you some some information. [00:27:52][14.4]

Alec: [00:27:52] The other option is your brokers. And I'm not going to throw a broker under the bus, but one of the brokers that I use prepares tax statements by the end of October. And it's like my tax returns due before that. [00:28:04][12.0]

Speaker 4: [00:28:05] And that is of [00:28:05][0.9]

Alec: [00:28:06] no help to me. And it adds no value getting it in October. [00:28:09][3.0]

Speaker 4: [00:28:09] So, you know, you sort that out Ren. [00:28:14][5.1]

Bryce: [00:28:15] Speaking of tax, what should and this is not directed to you, Ren this is your house. It's a confusing time of year, end of financial year. It's enough to sort of be dealing with ATO as it is. But you've just taken on some investments for the first time. You've got your ETF sitting there. They've paid a distribution or a dividend or perhaps they haven't. What should an investor be thinking about? [00:28:39][24.5]

Alistair: [00:28:40] Just think about which ETFs you've got in your portfolio. Like you said, if you've got multiple registries, make sure you're remembering everything that's within your portfolio. Things that are going to impact your tax return will be what distributions were paid. So if if an ETF doesn't pay a distribution, you actually get an annual tax statement, there's nothing to tax and that those distributions will be made up from dividends. They might be capital gains. As I said before, those are distributed to investors. So all of these are going to impact how much how much tax you pay. If you bought or sold an ETF as well, you're going to be crystalising your own capital gains. Potentially. [00:29:16][36.5]

Bryce: [00:29:17] If I've bought an ETF, it's gone up 10 percent. I haven't sold it. Do I have to pay capital gains tax? [00:29:22][5.4]

Alistair: [00:29:23] No. Unless the fund has paid you a distribution, there's nothing to do. As long as you're still holding it, there's no tax event actually crystallising anything. Yeah, nice. [00:29:31][8.4]

Alec: [00:29:32] So some investors invest for income. Maybe there's a whole other class of investors that actively seek out ETFs that don't pay dividends because they want simplicity at tax time. [00:29:41][9.4]

Alistair: [00:29:42] Absolutely. I mean, [00:29:43][0.8]

Speaker 4: [00:29:45] I don't want any distributions. [00:29:48][3.3]

Alistair: [00:29:49] So, yeah, it's more of a headache. The more distributions you have, honestly, the more of a headache it can. It can be if you if you were just holding something that never distributed and it's only once you sell that you got any kind of tax event, those don't really exist because you do have rebalancing in funds that is required. So but if if you could do that, the simplest form [00:30:09][20.1]

Bryce: [00:30:09] are other tax considerations. If you are paid a dividend, but it's reinvested. [00:30:14][4.3]

Alistair: [00:30:15] Yes, there are. You are given the associated franking credits in that like they don't just disappear. So even if you were reinvesting all the dividends, you still get all the franking credits that would be associated to that. But it is still classed as a tax event. So because you've made income from that investment. Yeah. If you were paid the dividend and just reinvested back in the. Because that's all that's dividend reinvestment is it's just we do it for you probably save brokerage compared to what we're paying. So it is still a tax event that. [00:30:45][30.0]

Alec: [00:30:45] Yeah, we've talked about how you manage the process while holding the main things are jump on the registry, make sure you know what's going on there. Don't lose your logins and Shridhar. And then obviously at tax time, there's a number of considerations, especially around the distributions. So that's the key considerations when you're managing it. Now, the final part of the ETF journey is actually selling and hopefully you're selling for a large gain after you've held it for a long period of time. So I guess if we start broad and this is a this is kind of a how long is a piece of string question, but I'm going to ask it anyway. When should an investor sell an ETF? [00:31:23][38.1]

Alistair: [00:31:25] Quite a few different reasons they could sell, actually. Sometimes you just need the cash. I've sold some things and that might impact which ones you sell. You might sell something at a loss because, yeah, you're not going to like you're not going to give yourself a tax bill if you just needed the cash to make an emergency payment or some. Some people invest for something. You might be investing for a deposit on a house. And when that time comes around, it's going to be time to sell some of your investment. So it's not always like a tactical play. Are there other reasons people sell them? There may be a new ETF that's come to market that they prefer. Is that sort of. Exposure, others, if you are being more active with it, you know, the more tactical exposures, you may have had a six month view on Europe or the U.K., it's been like incredible value since Brexit. And you thought that was that was going to sort of work out in the Covid came out and trashed that. But. But you've made some tactical active positions in your portfolio and you see something else you'd like to do. So it's not always 100 percent buy or sell. The other thing is if you're rebalancing your portfolio and there's a key one, like if you invested into two stocks or two to ETFs, whichever one performs better is going to become a bigger part of your portfolio because that monetary value is going to increase. An important part when you are building a portfolio is rebalancing. So you're keeping to what your original asset allocation was. So you might trim something off and reallocate it back in, you know, on a stock specific basis anyway. But Afterpay it Dollars that's now will a considerably more money in their portfolio and they may take some profits and bring it back down because now you're heavily exposed to one stock. So as something grows, it can actually alter your diversification [00:33:17][112.7]

Bryce: [00:33:19] to close that out. You know, he's spoken about what you need to do when you buy and when you're holding it as an investor need to do anything when other than obviously hit the sell button. Is there anything they need to consider when selling an ETF? [00:33:29][10.6]

Alistair: [00:33:30] It's pretty straightforward in terms of the sale process on screens very similar to the by the buy process. After that, when it comes to the registry, you've got another letter where your exact statement, it'll tell you when it was that you sold, because these are going to have tax implications, knowing how long you held it for. Yeah. You know, going back to franking credits, you have to give out something for 45 days to get franking credits if it's been less than that's going to. So there are a myriad of different things that are going to impact what happens after you sell. And most of them are to do with tax. Yeah, yeah. And like I said, I'm not a tax adviser. I was one of the more complicated issues. [00:34:10][39.9]

Bryce: [00:34:11] But it is annoying to understand. But just record your transactions in any way possible, I think, because when it comes to tax time, if they go, oh, what do you sell? I should I did sell that. When did I do it? What I sell it for was at a loss. Was the A profit. Yeah. [00:34:24][13.0]

Alec: [00:34:24] Yeah. If you don't want to record it all yourself, there are a bunch of websites and stuff out there that can help you do that. I mean we've previously had the founder of share site on the show before, but there's a bunch of others as well. But I think that timing point is a really important one as well, because there's all these rules that franking credits roll. There's a rule around capital gains, discounts if you've held an asset for over a year. And I'm sure there's a bunch of other ones as well. So you record what you paid, how much you bought and how long they held it for. At a very minimum, you're [00:34:54][30.0]

Alistair: [00:34:55] an accountant will help you with all of that like that. They do do provide a decent service. But, yeah, just make it easy for them. And it is a lot easier now. Everything's online. I mean, even if you're using a brokerage account, the records are all there, even if you have shredded all of your letters, whereas back in the day you'd just be leafing through papers. You know, you never you never know what you're doing. So most stuff is in one easy to access place nowadays. [00:35:20][25.0]

Alec: [00:35:21] One final question about selling. Does anything change for an Australian investor? If they're selling an Australian ETF or an Australian ETF that holds overseas assets, [00:35:31][10.4]

Alistair: [00:35:32] it shouldn't make too much of an impact to your nest. If the fund is Australian domiciled, you basically invested in Australian security there. Again, it's going to have more tax implications is the thing. It say those franking credits, the CGT discount from a broad basis. It shouldn't make too much of a difference. [00:35:50][18.4]

Alec: [00:35:51] Yeah, yeah. The good thing about selling an Australian ETF that holds US equities rather than like US equities directly, is that the timing piece like you get it during the day. [00:36:02][11.2]

Speaker 4: [00:36:03] That's true. To sell it to stay up. Yeah, well, [00:36:08][4.8]

Bryce: [00:36:08] I'll you've managed to make some of the more uninteresting parts of ETF [00:36:12][3.5]

Speaker 4: [00:36:12] interesting. So thank you for that. [00:36:14][2.2]

Bryce: [00:36:15] It's been a pleasure having you on Get Started Investing feed. Big thanks. And look, we look forward to keeping in touch. I think there's going to be many more questions that come through as our audience grows with this sort of product. So appreciate [00:36:26][11.6]

Alistair: [00:36:27] it. Now, thanks very much for having me on. And yeah, hopefully next time talk about something more [00:36:30][3.1]

Speaker 4: [00:36:30] interesting than that. Yeah, I promise you. Thank you. [00:36:30][0.0]

[2021.8]

More About

Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

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