Low- cost ETFs will provide flexibility

Jason is a Sydney-based financial planner and head of wealth management at independently owned boutique planning business 5 Financial.

With so many options available and uncertainty around their future, it’s been understandably easy for Heidi and Martin to settle into a state of inertia and do nothing. It’s great to see they’re now ready to take control of their financial future.

The key to making any investment decision, whether property or shares, is having a clear understanding of the investment’s purpose and how it fits in with their future plans.

Heidi and Martin don’t need to lock themselves into something with high entry and exit costs that can’t be easily exited. This applies very much to property, with its high entry costs such as stamp duty, legal costs and inspections – not to mention the time cost involved in searching and completing the transaction. On exit, there are agent’s fees and, of course, there is a lack of price transparency in that you don’t know what the property is truly worth until you have a signed contract in your hand.

Additionally, if changes are likely in Heidi and Martin’s family situation and work arrangements, being locked into a mortgage isn’t a great idea.

The foremost risk-free strategy is for Heidi and Martin to pay off expensive personal loans – in particular Heidi’s student loans in the US, especially with the Australian dollar being stronger. This gives an instant return of 6.8%pa tax free.

In our experience, global workers need to maintain flexibility when investing. ETFs, through the likes of State Street and Vanguard, provide ultimate flexibility. Offering excellent liquidity and diversification benefits (the No. 1 rule of invest-

ing), the underlying investments are highly transparent, with the value absolutely known between 10am and 4pm Monday to Friday. Furthermore, transaction costs are minimal relative to property.

Investing is more than just which asset performs better. Transaction costs and strategic management are significant considerations. With ETFs, managing future capital gains (should Heidi and Martin need to sell in the future) is easier as they can sell down parcels over multiple years rather than all at once. In this way, they avoid paying tax on a fair chunk of the gains at the top marginal rate of 49%. They can also easily shift ownership around with minimal cost. This would be important if one of them takes time off work to care for children, and therefore has a low tax rate.

One of the powers of property investing is being able to gear – that is, to borrow to invest, giving you a much larger asset base. The same can be said for ETFs, particularly using self-funding instalment warrants (SFIs), which have the added benefit of protection against price drops below a certain level.

Heidi and Martin could use their existing savings, less the funds for their wedding and travel home, to establish a geared ETF portfolio using SFIs.

Given their strong savings capacity, Heidi and Martin can add to the investment on a regular basis. This gets their money working for them straight away.

Overall, SFIs over ETFs offer Heidi and Martin greater flexibility, diversification, transparency, liquidity and cost advantages compared with being locked into a property investment.