Your questions answered by an industry expert
Investing in STWs
Can you see any problems with investing in STWs? What would you believe should be the maximum proportion of a super portfolio that should be invested in STWs? John, Bulli, NSW.
John, while we can't provide you with any specific investment advice, as we don't know anything about your circumstances, this is some general information on STWs which you like might to consider. STW is the ASX investment code for the SPDR S&P/ASX 200 listed trust. All listed trusts are managed under the Corporations Act. This places a number of rules around the operation of the fund to protect unit holders.
The fund has a number of separate entities that are obliged to act on an arm's length basis when dealing with each other. You could say this structure should protect investor's interests because there's a separate investment manager, separate administration and accounting entity, and then another separate sub- custodian that holds the assets of the fund. There's also a separate company that looks after the registry of unit holders called Link Market Services Ltd. An independent auditor, PricewatehouseCoopers, then audits the operations of the fund.
The investment itself seeks to closely match, before fees and expenses, the returns of the S&P/ASX 200 Index. This approach is designed to provide portfolios with low portfolio turnover, accurate tracking of the index, and lower costs.
The general risks of investing apply, but also in addition I believe amongst the other risks specific to this investment, as referred to in the product disclosure statement, there are a few points that need to be considered:
One of the main risks would be that the fund fails to manage its investments to closely match the index. The other would be that a company that makes up a large part of the index fails, such as BHP, which is unlikely, or say a number of companies failed at the same time, such as the banks. Think back to October 2008. But overall the portfolio would still survive, as there should be around 200 companies in there.
If the responsible entity breaches it's duties, the ASX may suspend the fund and therefore unit holders would not be able to sell their units on the exchange. If the fund is delisted from the exchange, the responsible manager has the right to wind up the fund.
The price as listed on the exchange may trade at a premium or discount to the net asset backing of the fund.
The fund will buy and sell share holdings throughout the year to match index weightings and this may result in capital gains being distributed to investors.
Investors then have to pay tax on these capital gains. Investors may not have been expecting to pay any tax on capital growth until they sold their investment.
The fund can invest in derivatives and this increases the potential risk of the fund if not managed properly. However, according to the information provided, the intention of the fund is to only use derivatives on a very limited basis.
So the investment offers a number of advantages as follows:
- No entry or exit fee, only applicable brokerage
- Diversified Investment
- Relatively low cost (Investment management Fee 0.275%pa plus Responsible Entity Fee of 0.011%pa - of fund net asset value)
- Transparency of performance: the fund manager publishes a daily list of the holdings in the fund
- Flexibility of trading
- Distributions and Franking of distributions and many others
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