SelfWealth SMSF Leaders ETF (ASX: SELF)

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The SelfWealth SMSF Leaders ETF (ASX: SELF or ‘the ETF’) is designed in turn to replicate
the SelfWealth SMSF Leaders ETF Index (the ‘Index’). The Index provider is SelfWealth
Limited (ASX: SWF), a provider of a flat-fee brokerage service and a community-driven
insights tool that pools information from around 80,000 Australian investor portfolios.
The Index aims to represent the performance of a portfolio of ASX-listed ordinary shares
assembled by applying a rules-based selection criteria to SelfWealth’s database of SMSF
portfolios. The methodological basis for the portfolio construction of the Index utilises
a combination of time weighted performance, equal weighting diversification, valuation
and a Solactive A200 Index filter (a replication of the S&P/ASX 200 Index), with all stocks
outside the ASX 200 excluded. The construction methodology is based on the Top 10% of
the circa 80,000 SMSF portfolios (equating to around 8,000 SMSF portfolios) through a
commercial agreement with BGL Corporate Solutions Pty Ltd (BGL), Australia’s largest SMSF
Administration and ASIC compliance software provider. It is expected the ETF portfolio will
typically comprise 30-60 Solactive A200 Index securities (minimum and maximum of 25-
75), and which will be rebalanced on a quarterly basis. Importantly, in what is a very strong
endorsement of the underlying construction methodology and appeal of the product, the
ETF has received an A$100m seeding from ETFS Capital (originally ETFS Securities, founded
by Graham Tuckwell). In independently undertaken and verified back-tested performance
the Index has generated 326 basis points of outperformance per annum over the S&P/
ASX 200 Total Returns Index over a seven-year period. IIR notes that given the rules based
methodology the historic back testing should have a very high degree of accuracy.
INVESTOR SUITABILITY
SWF’s marketing pitch for the ETF is effectively a product that is ‘powered by SMSFs, for
SMSFs’. IIR believe this is appropriate for a number of important reasons. First, portfolio
turnover can be expected to be reasonably high, as evident by the historic back testing. A
material number of constituent stocks can be expected to be in the portfolio for less than
12-months, and therefore not eligible for the CGT discount. As such, the ETF is highly likely
to be materially more efficient for low marginal tax rate investors (SMSFs and retirees) on
an after tax basis. Second, IIR suspects that a disproportionate number of the portfolios,
being based on SMSFs, are for investors approaching and/or in the retirement stage of their
investment lifecycle. It is not unreasonable to assume that the Index will exhibit a behavioural
bias to more established growth and income oriented stocks versus the higher risk (typically
ASX100-200 constituents) as indeed has been borne out through the back testing. With
respect to dividends, over the back tested period the Index generated almost the precisely
the same degree of income as the S&P/ASX 200 Index despite the zero exposure to A-REITs
and underweight exposure to the Financials sector. In effect, the Index has delivered
materially superior capital growth without compromising yield.
RECOMMENDATION
IIR ascribes a “RECOMMENDED” rating to the SelfWealth SMSF Leaders ETF. The ETF
is a globally unique product and service offering, in effect made possible by the unique
attributes of the Australian superannuation market (and BGL’s dominant market position). The
seed investment by Graham Tuckwell’s ETFS Capital provides immediate FUM scale for the
ETF and reassuring third-party confirmation of the strength of the underlying methodology.
We believe the fundamental basis of the Top 10% component of the underlying IP as an
investment strategy is sound. Successful SMSF investors are typically smart, highly selfinterested,
risk averse, and long-term investors, all of which provides a sound underpinning
for any investment strategy. Reassuringly, attribution analysis reveals the vast majority of
outperformance was derived from selecting the right stocks rather than sector selection.
This suggests a basis for persistence of outperformance moving forward - i.e. there is an
empirical validity to the methodology.