Cheapest way for regular investing into indexes?

[hiddencow]

Hello all,

I'm trying to find the most cost efficient method possible to make regular small investments into index funds.
I have had a look at both ETFs and normal index funds. Vanguard seem to be the cheapest for both.
However, it seems as with everything, we are getting ripped off compared to the US

The VAS standard ASX 300 ETF has an expense ratio of 0.15% which is pretty good. However the brokerage charges with ETFs kills it, especially for regular small investments. This is an even bigger problem when I want to buy about 3 ETFs to diversify with overseas stocks as well.
The equivilent Vanguard fund doesn't have any fees for contributions but the expense ratio is .75 down to .35% for amounts over 100k.

This compares with the US where its is .05% for both types of funds and you can get free brokerage if you trade with Vanguard.

I was thinking using interactive brokers might be an option. This brings the brokerage down to $6 per trade. No CHESS sponsorship is the cost though.
Then I was thinking that trades made on the US markets are only 1 dollar a trade. Would buying a US All stock index on the ASX or the NYSE make any difference? My only concern would be in terms of franking credits for any Australian stock ETFS would not be available.

Anyone have any other ideas? Really wish we had the access to the same cost Vanguard funds as in the US.

 

[Bill M]

Re: Cheapest way for regular investing into indexes

Anyone have any other ideas? Really wish we had the access to the same cost Vanguard funds as in the US.

Hello and welcome to the forum. I was in your position a few years back and at that time Vanguard didn't even have the equivalent ETF. That made me do it the old way of BPaying in small amounts when I had it. Yes the MER is higher but I think it is expensive to pay $20 or $30 for a small buy of say $500 worth or so.

When I eventually built up a decent size parcel I opted to sell the lot and buy the ETF. By doing that at least I could buy and sell at a moments notice and save management fees. When I sold the Vanguard unlisted ASX 300 product I remember having to wait a few days before it was acted upon and in my account. (not real good if markets are crashing)

For me, small amounts I would do it the unlisted way, for larger parcels I would go ETF. I do not use any brokers that do not do CHESS for me, good luck with your investments.

 

[So_Cynical]

The ANZ Online Investment Account allows you to invest small amounts cheaply and regularly in the ASX200 index.

http://www.anz.com.au/personal/investing-super/shares-managed-funds/online-investment-account/

 

[skyQuake]

I think http://www.stockspot.com.au is doing something like what ure after

 

[Panaman]

I think http://www.stockspot.com.au is doing something like what ure after

Thanks for that link, sounds a great service this firm may be offering, for someone like me setting up and running there own SMSF this sounds just the ticket.

 

[hiddencow]

Thanks for the replies. Looks like vanguard is still the cheapest way. Too bad not more aussies take an index approach so we can have cheaper fees. I called vanguard up and they said they are accepting min 100k into their wholesale funds so that'll probably be the option i'm taking.

 

[stockspot]

I think http://www.stockspot.com.au is doing something like what ure after

Hi,

I’m a new member and was referred to this thread because our website (Stockspot) was mentioned. SkyQuake you are right - Stockspot will be launching low-fee ETF model portfolios early next year. Happy to help answer any questions you have on our service or ETF investing generally.

Chris @ Stockspot

 

[Panaman]

Hi,

I’m a new member and was referred to this thread because our website (Stockspot) was mentioned. SkyQuake you are right - Stockspot will be launching low-fee ETF model portfolios early next year. Happy to help answer any questions you have on our service or ETF investing generally.

Chris @ Stockspot

Hi Chris

I for one will be interested in your service and have registered my interest via your site, from reading your site and about etf,s I can see there is a decent selection of products and providers, the best to me with decent track records with there products look like Vanguard and State Street, how do you rate the varies providers overall?.

Could I ask from seeing that you have worked in the funds management area, do you know if any ASX listed international fixed interest/Bond or international property etfs may be in the pipeline as these are the 2 sectors that don’t seem to be covered as yet.

With your service can you expand a little more how it will work ?, that is would clients need accounts with certain brokers or institutions, will you partner with any superfund administrators with your product, I am setting up an account with esuperfund and will have to use certain brokers and bank accounts both to get there low fees and for them to be able to access my transactions.

thanks

 

[stockspot]

Hi Panaman,

In response to your questions;

Hi Chris

I for one will be interested in your service and have registered my interest via your site, from reading your site and about etf,s I can see there is a decent selection of products and providers, the best to me with decent track records with there products look like Vanguard and State Street, how do you rate the varies providers overall?.

Panaman, first you need to define what's meant by 'track record'. Unlike active funds who aim to beat or ‘outperform’ the market over time, index funds or passive ETFs typically just aim to replicate the index performance. By simply tracking the target Index, passive ETFs are able to offer lower management fees than active funds who need to hire (and pay for) teams of analysts, investment managers etc. VAS was mentioned earlier in the thread. That particular ETF seeks to track the return (income and capital appreciation) of the S&P/ASX 300 Index before taking into account fees, expenses and tax. One way to look at effectiveness is how closely the ETF has matched the index return. Over the year to October 31st VAS returned 24.83% versus the ASX300 index which also returned 24.83% - so performance was spot in. Similarly, that particular fund on average trades within 0.20% of its Net Asset Value (NAV) – so on a day to day basis it has been effective at tracking its target index.

On our website we have compared 22 of the largest ASX listed ETFs across 5 metrics including ‘tracking error’ which is described above. We will add to this research as the ETF universe grows in Australia.

Could I ask from seeing that you have worked in the funds management area, do you know if any ASX listed international fixed interest/Bond or international property etfs may be in the pipeline as these are the 2 sectors that don’t seem to be covered as yet.

That is an excellent question. I agree that a greater choice of fixed income ETFs would benefit Australian investors immensely – particularly SMSFs who already face large concentration risk (typically domestic equity, hybrids and corporate bond portfolios are all heavily exposed to the big 4 banks). Likewise there is an opportunity to improve portfolio diversification by enabling direct access to global REITS in addition to the ASX listed property trusts.

But to answer your specific question – as ETF education and adoption increases over the next few years I expect more ETFs will emerge that will plug the diversification gaps in Australian portfolios. Particularly, as you mentioned, exposure to global bonds and international property. I will certainly pass on your feedback to the ETF issuers (State Street, BetaShares, Market Vectors BlackRock, Russell, Vanguard etc), but as we are not affiliated with any issuers I cant really speak to timeframes.

With your service can you expand a little more how it will work ?, that is would clients need accounts with certain brokers or institutions, will you partner with any superfund administrators with your product, I am setting up an account with esuperfund and will have to use certain brokers and bank accounts both to get there low fees and for them to be able to access my transactions.

As you intimated, we are partnering with a broker, cash management account and administration provider to offer clients an ‘all inclusive’ service encompassing scoped advice, asset allocation, ETF selection, execution, admin and reporting. Happy to provide more details offline as I don’t want to spam ASF.

Please note that this information has been provided as educational material only. None of this post constitutes advice of any sort (general or personal).

Chris @ Stockspot

 

[Panaman]

Thanks Chris

I didn’t explain very well what I meant by track record but you answered what I was wanting to know anyway ( how well the etf tracked there index).

Another question I had was on liquidity, I quite like the etf, BOND from State Street, it’s a diversified bond fund but most days there is zero volume but if I look at the bid/offer its always there all be it a 4 or 5 cent spread that often moves during the day, im guessing this is State Street themselves offering to sell at a small premium or buy back at a small discount at any given time, is there regulatory obligations for the etf providers to do this ?, others are very liquid, STW for example is active all day.

I’m very interested in your service, from what your saying you will almost be a one stop shop, can you maybe give us an idea of how often you will review your core portfolios and what kind of turnover a client may have each year, also is there going to be a minimum account size requirement, or an account size that would make it viable to do as I assume if there’s brokerage to be paid then a small account of say $5000 would make it not worthwhile.

 

[stockspot]

Another question I had was on liquidity, I quite like the etf, BOND from State Street, it’s a diversified bond fund but most days there is zero volume but if I look at the bid/offer its always there all be it a 4 or 5 cent spread that often moves during the day, im guessing this is State Street themselves offering to sell at a small premium or buy back at a small discount at any given time, is there regulatory obligations for the etf providers to do this ?, others are very liquid, STW for example is active all day.

Panaman,

You are right that the fixed interest ETF you mentioned (BOND) does not trade every day despite maintaining a tight bid / ask spread. Possibly more important than the trading liquidity is the asset’s underlying liquidity. Since the BOND ETF holds a portfolio of Australian Government Bonds, the underlying liquidity is actually quite deep. This enables the ETFs market maker (who is Deutsche) to offer a tight bid/ask as they are able to hedge in the underlying bond market. ETF market makers are incentivised by the ASX to promote tighter spreads and improved liquidity: http://www.asx.com.au/products/etf/market-making.htm

I’m very interested in your service, from what your saying you will almost be a one stop shop, can you maybe give us an idea of how often you will review your core portfolios and what kind of turnover a client may have each year, also is there going to be a minimum account size requirement, or an account size that would make it viable to do as I assume if there’s brokerage to be paid then a small account of say $5000 would make it not worthwhile.

We will review portfolios continuously and rebalance periodically when investment weightings in the different asset classes deviate from target allocations. Strategic rebalancing will be included in the cost. Ultimately our aim is to make professional portfolio management accessible to more people, so our minimum investment will be less than a typical WRAP or SMA platform.

Chris @ Stockspot

 

[daffyd23]

I've chosen the ETF option as I tend to invest not-so-small amounts not-so-often.

Another option is Colonial FirstChoice Wholesale Investments (Note I have no connection with them). They have some core index funds around 0.4x%-0.5x% which is a bit more than an ETF. However after the minimum of $5000 initially you can set up regular deposits of $100 or more which may be handy if you'd rather do regular automated investing.

PDS and investment options are here:
http://www.colonialfirststate.com.a...95.pdf,FS5111.pdf,FS5137.pdf&LiteratureId2130

 

[waimate01]

Another option is Colonial FirstChoice Wholesale Investments (Note I have no connection with them). They have some core index funds around 0.4x%-0.5x% which is a bit more than an ETF. However after the minimum of $5000 initially you can set up regular deposits of $100 or more which may be handy if you'd rather do regular automated investing.

I had money with four Colonial Wholesale funds for a few years. I got sick and tired of Colonial trumpeting a reasonable return, but with massive churn on the portfolio and with a massive tax bill that sheets home to me, not them.

You end up paying real dollars in tax, every year, on what amounts to an unrealised gain (realised in their hands, not realised in yours). Their performance claims do not take the tax into consideration.

Two of my Colonial funds were index-based, two were active. The index-based ones were not as bad as the active ones, but still operated according to the same principle. I was glad to see the back of them.

 

[stockspot]

I had money with four Colonial Wholesale funds for a few years. I got sick and tired of Colonial trumpeting a reasonable return, but with massive churn on the portfolio and with a massive tax bill that sheets home to me, not them.

You end up paying real dollars in tax, every year, on what amounts to an unrealised gain (realised in their hands, not realised in yours). Their performance claims do not take the tax into consideration.

Two of my Colonial funds were index-based, two were active. The index-based ones were not as bad as the active ones, but still operated according to the same principle. I was glad to see the back of them.

waimate, you make a good point. One of the lesser-understood disadvantages of investing in a fund structure is the loss of control over tax. Not knowing your tax liability throughout the year, and when purchase and sale decisions are made can lead to undesirable outcomes. As you've seen, this can also impact returns.

Thus the growth of Separately Managed Accounts (SMAs) in Australia over the last few years, as this structure allows investors to maintain beneficial interest over the securities and the related tax advantages: http://www.moneymanagement.com.au/a...-are-the-pros-and-cons-of-using-an-australian

 

[Beej]

waimate, you make a good point. One of the lesser-understood disadvantages of investing in a fund structure is the loss of control over tax. Not knowing your tax liability throughout the year, and when purchase and sale decisions are made can lead to undesirable outcomes. As you've seen, this can also impact returns.

Thus the growth of Separately Managed Accounts (SMAs) in Australia over the last few years, as this structure allows investors to maintain beneficial interest over the securities and the related tax advantages: http://www.moneymanagement.com.au/a...-are-the-pros-and-cons-of-using-an-australian

Yea - SMAs are great, but I think they are too expensive now (1%-1.5% typical total fees). And a lot of the SMA firms seem to not like independent investors, seemingly preferring (structured fee-wise) to deal through financial advisors, which I have no interest in doing!

So I'm currently in the process of incrementally moving a heap of funds out of an SMA and directly into listed ETFs (I like VAS and ILC for local equities, and VTS for US). The ETFs are just so much cheaper, and give you pretty much the same gross returns, with as much flexibility, when compared to the SMA I think, especially with regards to index tracker type products.

 

[Panaman]

Came across this today on the iShares (Blackrock) site, if your interested in building and managing an ETF portfolio, well worth a read about suggested Portfolios, don’t have to use iShares for all sectors, the likes of Vanguard and State Street also have similar offerings,

http://au.ishares.com/publish/content/documents/pdfs/iShares-model-portfolios-diversified-ii.pdf