Choosing between superannuation and exchange-traded funds (ETFs) can feel like a big decision, especially when both play such different roles in growing your wealth. Super is the cornerstone of retirement savings in Australia, while ETFs are known for their flexibility and accessibility. Knowing how each one works – and what they can do for you – is the key to making smarter choices about your money.
When it comes to investing, Australians are faced with a variety of choices. Two of the most popular options are superannuation and exchange-traded funds (ETFs). Both have their merits, but they serve different purposes depending on your financial goals, how long you plan to invest, and your lifestyle ambitions. This article aims to take a closer look at the unique benefits of investing in superannuation and when opting for ETFs might be a smarter move.
Why superannuation stands out
Superannuation is Australia’s primary tool for retirement savings, with a range of advantages designed to encourage long-term financial security. Here’s why super often edges out ETFs for many investors:
1. Tax benefits that add up
One of the standout features of superannuation is the retirement savings that come with it – savings that are tough to match through other investment options.
- Lower contribution tax: Super contributions (up to certain limits) are taxed at 15%, a rate that’s much lower than what most people pay on their regular income. This could allow you to save more by keeping more of your money working for you. In contrast, investments in ETFs are made with post-tax dollars, and any profits or income generated are taxed at your marginal rate, potentially reducing your returns
- Tax on investment earnings: Super funds tax investment earnings (e.g., dividends, interest, capital gains) at just 15%, and that rate can drop to 0% once you’re in the pension phase. Compare this to owning ETFs in a personal account, where earnings are taxed according to your marginal rate – likely higher than what you’d pay in super
Super and investing taxation can be tricky, so if you ever need advice, make sure to reach out to a tax accountant.
2. Built-in variety across assets
Super funds often offer automatic access to a broad mix of asset classes, including domestic and retirement savings, bonds, property, cash, and infrastructure. This diversification helps spread your risk and may smooth out returns over time.
- Professional portfolio management: Many super funds allow you to choose from pre-set portfolios (like balanced, growth, or conservative), depending on your risk tolerance. These portfolios are actively managed by professionals who adjust them as market conditions change – meaning you don’t have to worry about daily decision-making
- Cost-effective diversification: Super funds pool members’ money together, allowing them to access investments that could be difficult or expensive for individual investors to manage alone.
3. Employer contributions on autopilot
One of the most compelling reasons to favour super is that contributions from your employer are mandatory. These contributions, currently 11.5% of your salary, are added to your super automatically.
Even if retirement seems far off, you’re steadily building wealth without having to do anything. This can create a solid financial foundation over time. Compare this to investing in ETFs, where you need to manually make contributions out of your own pocket – after taxes have already taken their share. Having said that, investing platforms with offer automated investing (like Pearler!) can simplify the process.
4. First home super saver advantage (FHSS)
Superannuation isn’t just for retirement – it could also help you achieve other financial milestones, like buying your first home.
The First Home Super Saver (FHSS) scheme allows eligible first-time home buyers to make voluntary contributions to their super and later withdraw these funds for a house deposit (read more about FHSS here and here). The beauty of this is that these contributions benefit from the lower superannuation tax rate. This could possibly give you a boost compared to saving through a regular savings account or ETFs.
5. Extra protection and cover
Superannuation offers built-in protections and benefits that individual ETF investments don’t.
- Debt protection: If you ever face bankruptcy, your super is generally safe from debt collectors, giving you an extra layer of protection that investments outside of super can’t provide
- Automatic insurance coverage: Many super funds provide insurance. This typically includes life insurance; total and permanent disability (TPD) insurance; and income protection by default. This means that without lifting a finger, you have a safety net in place, whereas ETF investors would need to organise (and pay for) their own coverage
When ETFs might suit better
While superannuation offers many attractive features, ETFs can offer more flexibility and freedom in certain circumstances. Here’s when you might consider ETFs instead:
1. Planning for early access to funds
Superannuation has one big limitation: you generally can’t access your funds until you hit the preservation age (55 to 60, depending on when you were born). If you’re aiming to retire early or become financially independent sooner, super may not give you the flexibility you need.
With ETFs, you’re in control. You can sell your investments fairly easily and access your cash for early retirement.
2. More choice in how you invest
While super funds offer diversification, they often limit your investment choices to a handful of portfolios. If you’re an investor who prefers to be more hands-on or to tailor your investments to specific sectors or themes, ETFs can offer greater flexibility.
- Pick your own sectors and themes: With ETFs, you can target specific industries (like technology, clean energy, or healthcare), regions, or asset classes. This level of control allows you to tailor your portfolio to match your interests and market views. While some super funds do allow you to select individual assets, most provide broad exposure to a basket of assets to simplify the process
- DIY portfolio building: For investors who like to manage their own strategy, ETFs offer the ability to construct a personalised portfolio. Superannuation funds typically don’t allow this degree of customisation
3. Liquidity for short-term goals
While super is designed for the long haul, ETFs offer liquidity, meaning you can buy or sell them on the stock market whenever it’s open. This could make ETFs ideal for saving towards medium-term financial goals, like buying a car, taking a trip, or investing in a new business venture.
4. Higher risk for potential reward
Have a higher appetite for risk or investing for a shorter time frame? ETFs can provide more aggressive growth opportunities than super.
- High-risk, high-reward investment choices: ETFs give you access to niche areas like emerging markets, small-cap stocks, or even cryptocurrency – asset classes that may not be offered by your super fund. This makes them a popular option among investors seeking higher returns, albeit with more risk. With that said, many ETF investors choose broad index ETFs, which perform in a similar way to super funds.
- React to market opportunities: Unlike super, which encourages a “set and forget” approach, ETFs can be traded frequently. This means you can adjust your investments based on market conditions and take advantage of short-term opportunities
Final thoughts
Superannuation is built for long-term retirement security, with tax perks, compulsory contributions and added protections. ETFs, on the other hand, give you flexibility, control, and easy access to your money whenever you need it.
So which is better?
It really comes down to your goals. If retirement savings and tax breaks are your top priority, super is hard to beat. But if you want more choice, flexibility, or earlier access, ETFs could be the way to go. A mix of both might even be the sweet spot.
If you’re curious to see how ETFs can fit alongside your super, Pearler makes it easy to start small, stay consistent, and invest with confidence. Think of it as the DIY half of your wealth-building toolkit, while super keeps working quietly in the background.
