When you're investing for the long term, it’s important to have a solid grasp of the options available to you. Two options you might come across on your long-term investing journey are ETFs (exchange-traded funds) and superannuation funds. Both have unique features, advantages, and similarities that attract investors with long-term goals for Financial Independence. In this article, we break down ETFs and superannuation to help you better understand the differences between the two investing options. Hopefully, you’ll walk away with enough knowledge to see how each might fit into your long-term investing strategy .

What is superannuation?

Superannuation, or "super," is a long-term savings plan with the specific purpose of providing income during your retirement. In Australia, your employer is required by law to contribute a certain percentage of your earnings into a super fund on your behalf. This fund invests in a variety of assets, growing your retirement savings through compounding interest with lower tax rates on the income earned.

What are ETFs?

ETFs are managed funds available on stock exchanges, similar to stocks, and you can buy them on investment platforms like Pearler . ETFs invest in underlying assets, giving you access to multiple investments at once, like stocks, commodities, or bonds. This allows you to purchase a diversified portfolio through a single transaction. Investors are generally drawn to ETFs for their liquidity, lower fees, and transparency.

Key differences between ETFs and superannuation

In the journey of investing, understanding the distinct characteristics of ETFs and superannuation is key to making informed decisions. Here are some of the differences you should know:

Feature	ETFs	Superannuation
Purpose	Flexible investment for various goals, accessible at any trading time.	Primarily for retirement savings, with restricted access before retirement age.
Investment control	Wide selection, offering freedom to choose and adjust investments.	Limited by the fund’s choice of investment options, though some funds offer different strategies.
Fees and costs	Generally lower fees, as most ETFs are passively managed.	Includes administration and investment fees, among others.
Tax considerations	Subject to capital gains tax, but may benefit from franking credits and capital gains discounts.	Contributions and earnings are taxed at concessional rates.
Risk and return	Also varies with the choice of ETF, influenced by the underlying assets. Actively managed ETFs tend to have higher risk than passively managed ETFs.	Varies based on the chosen fund, from conservative to aggressive.
Access and liquidity	Australian investors access ETFs on the Australian Stock Exchange (ASX). ETFs have high liquidity and can be bought and sold anytime during stock market hours.	Working Australians can set up a super fund and start investing. Super funds are designed for retirement, with early access under certain conditions.
Ownership	Investors own shares of the ETF, which represents ownership in the fund’s portfolio of underlying assets.	Investors own a share of the fund, but not the underlying assets directly.
Asset allocation	Investors can choose from a wide range of asset allocations through different ETFs offered by the ETF provider.	Predetermined by the fund, often with limited flexibility for the individual investor.

The unique features of ETFs and superannuation cater to different aspects of an investor's strategy. Different approaches can range from focusing on retirement savings to wanting flexible investment options, or seeking specific asset allocations. Understanding these key differences can guide you in tailoring your investment portfolio to meet your long-term financial goals.

Key similarities between ETFs and superannuation

ETFs and superannuation funds, while different in many ways, also have similarities that can make them valuable components of a diversified investment strategy. Let’s look at a few of those shared characteristics:

Recognising these similarities can help you see how ETFs and superannuation might fit into your broader financial strategy. It's also worth reading the product disclosure statement for each product you want to invest in to better understand its features. Both investment types offer different avenues for achieving long-term financial security. Understanding how these investment types complement each other can provide a more holistic approach to your investment planning. This is true whether you’re building wealth for general purposes or specifically for retirement.

What investing strategies are used for ETFs vs superannuation?

Investing strategies for ETFs and superannuation are determined by different factors. For ETFs, it’s up to the investor to decide what strategy they’d like to use based on their goals, preferences and investing style. Superannuation, meanwhile, funds offer a limited number of investing strategies for investors to choose from.

ETF investing strategies

Investing in ETFs can offer a flexible and diversified approach to portfolio building, catering to various investment strategies:

• Passive investing strategy - this strategy involves buying ETFs that track major indices and holding them for the long term. It's based on the belief that it's difficult to consistently outperform the market, so by mirroring the market's performance, investors can achieve solid returns over time.
• Active trading strategy - active trading involves buying and selling ETFs over shorter periods to take advantage of market movements. Short-term traders might use technical analysis or market trends to time their trades. Investors can also choose to buy active ETFs that are actively managed to outperform the index.
• Sector rotation strategy - this involves moving investments into sectors that are expected to perform well, and out of those expected to underperform. It's based on economic cycles and market trends.
• Dividend investing strategy - focused on generating income, this strategy involves investing in ETFs that hold dividend-paying stocks. Investors seek steady income along with a potential increase in the value of the stocks they hold.
• Thematic investing strategy - this targets specific trends or themes expected to drive growth in the future. For example, this could be technology, sustainability, or demographic shifts.
• Fixed-income strategy - this involves investing in ETFs that hold bonds or other fixed-income assets that aim to provide steady and stable interest payments. Ideally, it's used to reduce the level of risk in an investment portfolio and generate reliable income.
• International exposure strategy - to diversify geographically and tap into growth outside their home country, investors might use ETFs focused on international markets.

Each of these strategies can be tailored to your risk tolerance, investment horizon, and financial goals. ETFs offer a flexible and efficient way to implement these strategies, providing access to a wide range of asset classes, sectors, and geographical regions.

Superannuation investing strategies

Investing strategies for superannuation are designed to build and manage retirement savings. Superannuation funds typically offer a range of investment options that cater to different risk profiles, investment timeframes, and retirement goals. Here's an overview of common strategies:

• Lifecycle or target-date strategies - the asset allocation is automatically adjusted as the member gets closer to retirement age. Initially, the investment mix is more “aggressive”, which means they’re higher in growth assets like stocks with prices that fluctuate more. Gradually, the investment mix becomes more “conservative”, and is higher in fixed income or cash as the retirement age approaches. This strategy is can be accessed through the super fund MySuper option.
• Balanced strategy - this is one of the most common superannuation investment strategies. It aims for a mix of growth and income by investing in a diversified portfolio that includes equities (stocks), fixed income (bonds), property, and some other types of assets. This strategy seeks to reduce risk through diversification while aiming for moderate growth.
• High growth strategy – this is targeted towards younger members with a longer time horizon to retirement or those with a higher risk tolerance. This strategy allocates a larger portion of the portfolio to growth assets like stocks and property. The goal is to maximise long-term returns, accepting higher volatility in the short term.
• Conservative strategy - suitable for those nearing retirement or with a low risk tolerance, this focuses on protecting the investment value more than growing it. Investments are mainly in fixed income and cash, with a smaller portion in growth assets. This strategy aims for steady, low-risk returns.
• Ethical or socially responsible investing - ethical strategies focus on investing in companies that meet certain environmental, social, and governance (ESG) criteria. This approach allows members to align their retirement savings with their personal values, investing in sustainable and responsible businesses.
• Direct investment options - some superannuation funds allow members to directly choose specific stocks, bonds, ETFs, or other securities. This strategy is for more active investors who prefer hands-on control over their investment choices.
• Cash and fixed interest strategy - focused on investments in cash deposits and fixed interest assets like bonds, this strategy offers generally low-risk and stable returns. It's suited for individuals who want minimal risk or are very close to retirement.

There are many investment strategies available through superannuation. Some large funds offer all of the above and other smaller funds offer few options. Superannuation investment strategies are about finding the right balance between growth potential and risk management. In doing so, the aim is to make sure retirement savings are protected and grow over time.

Can ETFs and superannuation work together in a long-term investing strategy?

ETFs and superannuation can play complementary roles in a long-term investing strategy, as they offer a blend of flexibility, diversification, and tax efficiency. Here's how these two investment types can work together to enhance a long-term investment portfolio:

Diversification

Superannuation provides a foundational investment that is often diversified across asset classes but within the limits of the fund's strategy. It's a long-term investment vehicle for retirement savings that benefits from compounding over an individual's working life.

ETFs, by contrast, allow investors to further diversify investments outside of superannuation. They can be chosen based on specific sectors, geographic regions, or asset classes. This additional layer of diversification can help manage risk and tap into growth opportunities globally.

Risk management

Superannuation funds often offer a range of investment options from conservative to high-growth, allowing individuals to adjust their risk exposure based on age, investment horizon, and risk tolerance.

Meanwhile, ETFs can be used strategically to adjust overall portfolio risk. For instance, if a superannuation fund is heavily invested in stocks, an investor might use bond ETFs to add stability or provide protection against unpredictable market movements.

Liquidity and flexibility

Superannuation is designed for retirement savings, and it’s hard for members to get their hands on their super before retirement age. This helps build long term growth but limits liquidity.

Comparatively, ETFs trade on stock exchanges, and provide liquidity and flexibility. The ETF market offers investors shares at market prices during trading hours, allowing for small adjustments to their investment strategy or accessing funds when needed.

Strategic allocation

By using superannuation as the stable core of a retirement strategy, focused on long-term growth and preserving wealth, investors can use ETFs to explore thematic investments . This includes themes like technology, healthcare, or clean energy, which might offer higher growth potential.

Investors can also use ETFs to adjust their exposure to certain markets or sectors based on changing economic conditions or market expectations. This might require more effort or be slower to achieve within a superannuation fund.

Incorporating both ETFs and superannuation into a long-term investing strategy allows investors to balance the need for growth, income, and risk management. It also provides the flexibility to adjust to changing market conditions and personal circumstances.

ETFs and superannuation – choosing what's right for you

The decision between ETFs and superannuation doesn’t have to be an either/or. Many investors use both to diversify their portfolio. Superannuation helps you save for retirement, providing a tax-efficient way to save over the long term. On the other hand, ETFs offer the flexibility to shape your investment strategy according to your goals and risk tolerance.

Understanding your financial objectives, risk appetite, and how hands-on you want to be with your investments is important. With this baseline, you can navigate the realms of ETFs and superannuation to build a tailored investment portfolio that’s right for you.

Whether you choose ETFs, superannuation, or both, the key step is to continue learning throughout your investing journey.