Exchange Traded Funds (ETFs) are a type of managed fund that’s listed on an exchange. They feature both growth assets such as shares and defensive assets such as bonds.
Instalment warrants are a loan structure with an additional level of investor protection. They allow an investor to increase their exposure to the growth assets.
“We’ve used instalment warrants over ETFs in clients’ portfolios for almost a decade,” says Jason Petersen, our Head of Wealth Management. “We’ve especially used them in self managed super funds to give our clients broader exposure to international equity markets.”
Jason’s expertise in instalment warrants over ETFs is acknowledged in the regular invitations he receives to speak on the topic.
Industry training company, Kaplan, recently interviewed Jason on the topic. This video has since been distributed to other advisers around Australia as part of their professional education training.
You can view it here:
Instalment warrants over ETFs in practice
In the video, Jason gives an example where an investor invests in an ETF costing $100 using $50 of their own funds, and $50 from the instalment warrant (effectively a loan).
This doubles their market exposure with only half the outlay.
When the instalment becomes due, the investor can choose to pay it out (which means they own 100% of the ETF), or they can choose not to, in which case the lender liquidates that part of the investment to recoup the loan.
“By doubling their exposure, an investor doubles the dividends, franking credits and capital growth arising from the investment,” says Jason. “However it’s important to remember that it goes the other way too.”
When considering the relative merit of using instalment warrants over ETFs for a particular client, 5 Financial looks at a number of factors. These include the client’s current gearing levels; the costs associated with the transaction (including Management Expense Ratio, brokerage, interest and cost of loan protection); the client’s time horizon and the ETF’s income sources.
“As noted in the video, there are many potential advantages in using instalment warrants over ETFs,” says Jason. “These include the leverage they offer, their simplicity, the access they give to franking credits, the limited downside risk, liquidity and diversification. They require no credit assessment and are suitable for use in self managed super funds.”
As Jason notes however, it’s just as vital to consider the possible disadvantages too.
“These include the underlying market risk, the potential for magnified losses, being unexpectedly sold out of a position through a stop loss, and the currency and market risk involved with international ETFs,” says Jason. “The way we use instalments really governs the level of gearing we’re prepared to take on. We are looking at people’s long term savings and we’re very conscious of that.”
If you’d like to know more about instalment warrants over ETFs – or to discover if they’re a good fit with your particular circumstances, goals and timeframe, you’re very welcome to attend a free consultation with one of 5 Financial’s experienced wealth management advisers.
An initial consultation is without cost or obligation. In it, our adviser will discuss with you your wealth objectives and any concerns you may have. As a result, we will be able to indicate if and how we are able to assist you. It also means you have the opportunity to understand our approach and to gain a feel for whether we are the right financial advisory firm for you.
Contact us today to book an appointment.