Tailoring ETF

[mcgrath111]

Hi All,

I'm wanting to put the majority of my cash into ETF's.

Reasoning:
1) I don't have the financial understanding to critically analyse companies.
2) Don't have the time / patience to research companies / give the time they deserve.
3) Don't like being too cash heavy.

Background:
24 years old
Current holdings: 95% cash
I would likely be putting in 70% of cash into the various ETF's.

Proposed ETF - Vanguard Growth Portfolio
Time Horizon: 25 - 30 years
Reasoning: Low Management expense & I can essentially leave it and let it do it's thing.
Any dividends would be reinvested.
Given my time horizon, I figure this is a reasonable strategy.
I will also invest additional amounts into each of the ETF's once or twice a year.

Vanguards growth portfolio suggests this:

Concerns:
US & AUS securities overvalued / anticipating reversal.

Considering my concerns around equity valuations would it be wise to wait? Or is it one of those thing where no one can predict the market.

Are there better alternatives to the ETF outlined? or other key considerations I should think of before investing? Is fixed interest a waste considering I will be paying brokerage and getting a similar rate to that offered by the big banks?


Greatly appreciate any advice.

EDIT: Link with other ETF's from Vanguard - might offer additional insight

 

[Ves]

This is definitely doable. It's also perfect if you want to be pretty much passive in your investing. General advice if you are taking this approach is do not time the market, because as you said, you don't have the skills to do this and should not make this a habit because you will be wrong more than right.

You can use the Vanguard Portfolio options (ie. Growth as you suggested) where all of the allocation is done for you and it is automatically rebalanced. I have a feeling that there is no ETF for this in Australia at the moment and you need to go through their managed funds to access it.

Alternatively you can pick individual ETFs and work out your own domestic shares/international shares/fixed interest allocation and rebalance it over time yourself.

Allocation is an interesting topic. Australian shares have higher yield and franking credits, but the market is pretty top heavy as less diversified. International shares have less tax advantages and lower yield but they are much more diversified. For instance you can buy the VGS international ETF and have a diversified exposure to the world's economies. This is all personal preference at the end of the day, all allocation methods will have their risks and you need to think about your end goal and stick to it.

Depending on whether you are a wholesale investor (most people are able to get into Vanguard wholesale managed funds with $100k or more if you ring them) or a smaller investor there may be fee differences after taking into account Management expenses (MER) differences (and brokerage costs) between Vanguard managed funds and their listed ETFs. That all depends if you are making further contributions and how regularly as well. If you are just going invest a lump sum, then leave it for 30 years without adding to it, by rule ETF holdings are cheaper. Vanguard's managed funds (especially wholesale) despite having slightly higher MER can work out cheaper over a life time if you are investing smaller amounts regularly because their buy/sell spread is cheaper than brokerage on ETFs. You can also invest as little as $100 at a time if I recall.

 

[mcgrath111]

Awesome, makes sense.

In regards to rebalancing:
1. How often does one rebalance? Every year, 2, 5 etc?

I always thought that Managed funds would work out more expensive, so perhaps in regards to smaller funds I should see if they offer the 'growth' option...which they likely do.

Many thanks,

 

[Ves]

Awesome, makes sense.

In regards to rebalancing:
1. How often does one rebalance? Every year, 2, 5 etc?

Ideally you want to rebalance as much as possible. Especially when the market causes your allocation to differ from your benchmarks. However, generally most people do it every 6-12 months to keep transaction costs down.

I always thought that Managed funds would work out more expensive, so perhaps in regards to smaller funds I should see if they offer the 'growth' option...which they likely do.

Many thanks,

By the way, when I mentioned managed funds I only mean the Vanguard index funds (they have options here that are not ETFs and not listed). Wouldn't bother with active funds.

 

[mcgrath111]

Ideally you want to rebalance as much as possible. Especially when the market causes your allocation to differ from your benchmarks. However, generally most people do it every 6-12 months to keep transaction costs down.


By the way, when I mentioned managed funds I only mean the Vanguard index funds (they have options here that are not ETFs and not listed). Wouldn't bother with active funds.

Thanks for your insight Ves, very helpful.

 

[bigdog]

The Age reported today
https://www.theage.com.au/money/investing/australian-etf-market-could-be-worth-100-billion-by-2022-20190710-p525wz.html?promote_channel=edmail&mbnr=MzIxMDQyMQ&eid=email:nnn-13omn658-ret_newsl-membereng:nnn-04/11/2013-business_news_am-dom-business-nnn-age-u&campaign_code=13IBU020&et_bid=29187460&list_name=2033_age_busnews_am&instance=2019-07-10--20-46--UTC

Australian ETF market could be worth $100 billion by 2022
By John Collett
July 10, 2019 — 4.54pm

The Australian ETF market has reached a new milestone, hitting $50 billion in assets under management after a surge of $10 billion in the first half of this year and predictions it could hit $100 billion by 2022.

Most ETFs are "passive" investments in that they track a market index, such as market indices and sub-indices in Australia and overseas, or track prices, such as commodity prices, and even currency exchange rates.

There are roughly 200 ETFs listed on the Australian market, whose units are traded the same way as shares.

They are proving popular with retail investors, especially those with self-managed super funds, because they can add instant diversification at low cost to portfolios often skewed heavily to domestic investments, such as the big dividend-paying shares.

In 2015, the market was worth about $18 billion - making it one of the fastest-growing sectors of the funds management industry.

Global asset managers, Vanguard and iShares continue to dominate the ETF market in Australia. Together, they account about 56 per cent of all money invested in ETFs. BetaShares, which is an Australian provider of ETFs, is the third-largest player, according to separate analysis by online investment adviser Stockspot.

Stockspot's chief executive and founder, Chris Brycki, predicted that ETF funds under management could hit $100 billion by 2022.

“Whether you’re investing in Australian shares, global shares or bonds, more than 80 per cent of active fund managers have consistently failed to beat the index," Mr Brycki said.

"It’s no wonder investors are abandoning risky stock picking for the safer option of tracking the market index," he said.

Of the $10 billion growth of the Australian ETF market over the first half of this year, about half is due to money flows into ETFs and half to the performances of the markets in which ETFs invest.

In its analysis of the latest ASX investment products monthly update, Vanguard Investments Australia highlighted a big appetite for defensive ETFs during the first half of this year, with Australian fixed income ETFs receiving the largest proportion of cash flows of any asset class.

Over the June quarter, Australian fixed income flows represented 36.5 per cent of overall flows, or $1.02 billion, the analysis found.

“The heightened interest in fixed income is potentially reflecting investors’ concerns about equity market growth prospects, with recently announced interest rate cuts not seeming to deter investors," said Duncan Burns, Vanguard’s head of equity index, Asia Pacific.

“Following a slow start to the year, cash flows into Australian shares ETFs returned to more normal levels during the June quarter, potentially reflecting the outcome of the federal election with fears of franking credit policy changes [proposed by Labor] put to rest," he said.

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