When a new ETF launches, standard practice is for an ETF issuer to engage a professional index provider to provide an index that targets the theme or sector that the ETF issuer wishes to target. Actuaries and Investment specialists then go about creating the rules that determine the ultimate investment makeup of the ETF.

SelfWealth, with their new ETF, the SelfWealth SMSF Leaders ETF (SELF) has put the power in the people’s hands, investing in the companies of Australia’s top performing Self Managed Super Funds (SMSFs). Today we take a look at SELF and who it may appeal to.

Who is SelfWealth?

Beginning life as a share portfolio tracking tool, SelfWealth are now listed on the ASX, offering an online share broking service to Australian investors. Their portfolio tracking tool provides them with great investing data, and they have built ranking tools to rank to top performing investors. These tools are being used to help them determine which companies to invest in within the SELF ETF.

What is the SelfWealth SMSF Leaders ETF?

With access to investing data on around 80,000 Self Managed Super Funds, SelfWealth have created an ETF that invests in the companies of the top performing SMSFs in their database. Essentially, they are crowdsourcing the investment decisions to the top performing individual investors in Australia.

The ETF invests in up to 75 ASX listed companies, applying equal weighting to their portfolio and rebalancing quarterly. By equal weighting the portfolio, they help to remove skew to the largest companies in Australia, a problem for some investors as banks in particular make up such a large proportion of the major indexes.

How are the companies to invest in chosen?

SelfWealth first rank all of their SMSF Investors in their Investment Database. They use a performance score which weights 1, 3, 6, 12 and Annualised performance of each SMSF in their database, with the top 10% of SMSFs then used for the next step.

They then look at all the shares held by these 10% of SMSFs, removing any companies that are held by less than 45 of the SMSF portfolios, helping to remove illiquid small companies and anomalies.

If the total number of companies remaining is between 25 and 75, then these are the companies included in the index. If greater then 75, the companies are ranked by market capitalisation and the top 75 included. If less than 25, step 2 is repeated, reducing the number of SMSF portfolios that much hold each company.

These companies are then invested in, in an equal weighted manner. If 75 companies are included in the index, each company will represent 1.5% of the portfolio.

This exercise is repeated quarterly, with the portfolio then rebalanced.

What does the current portfolio look like?

According to SelfWealth’s website, the current portfolio consists of 51 ASX shares. Below we compare the sector makeup of SELF to the SPDR S&P/ASX 200 ETF (STW), a fund that invests in line with the broad S&P/ASX 200 Index.

The sector allocation shows Australia’s top performing SMSFs love banks and miners, with Financials and Materials sectors making up 53% of the portfolio, not too dissimilar to the broad S&P/ASX 200 index. The key differences in the sector makeup is Property trusts, with the S&P/ASX 200 index including a 7% exposure to property, but SELF holding no property exposure.

How has SELF performed?

At the time of writing, SELF has only been available for one day of trading, so actual performance data is not available. However, SelfWealth have back-tested their strategy and show an outperformance across the 7 years of back tested history.

SelfWealth report a 14.21% per annum return of the index, compared to 10.98% for the benchmark. It is important to note that this is simulated only, and does not take into account ETF management fees (0.88% per annum) or tracking error.

What other ETFs are available like SELF?

SelfWealth has created a unique product with SELF. No other ETFs on the ASX crowdsource their investing decisions.

However, equal weight exposure to Australian shares is not a new concept, with Vaneck’s Australian Equal Weight ETF (MVW) being available since 2014, and recently passing the $1 Billion market capitalisation mark. We took a look at MVW some time ago, which invests in a similar sized universe as SELF, with around 75 individual shares.

We’ll be interested to see if the crowd can outperform a vanilla equal weight strategy over time, and if the higher management fees (0.88% compared to 0.35%) are justified. The index that MVW tracks (which excludes the impact of fees) has returned 11.39% over the last 5 years compared to 12.06% for SELF’s backtested returns. Once the impact of fees are accounted for, the 5 year performance is relatively similar.

What are the risks?

There’s an old saying in investing that yesterday’s winners may be tomorrow’s losers. The same risk applies here, with SMSFs who have recently outperformed more likely to rise to the top of the leaderboard. Do the top SMSFs have the skills to continue to outperform, or did they get there by sheer luck? We hope it’s the former.

What do we think?

We’re always excited to see innovation in the ETF space, and crowdsourcing of investing decisions to top performing SMSFs is certainly an innovative approach.

We’re keen to see if the crowd can outperform the professionals, and whether this innovative approach justifies the fees involved. With almost $500,000 in shares traded in the first day of trade, it appears there are plenty of investors excited by the SelfWealth SMSF Leaders ETF.

SELF is now available on the ASX.