ETF How to I buy ETF's, Index Funds without Broker?

Discussion in 'Shares & Funds' started by Sam Gallon, 24th Apr, 2017.

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  1. Sam Gallon

    Sam Gallon Member

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    Hi Guys,

    I am very new to the whole investing side of things and was so happy to find a local forum like this.

    My question is very basic. How do I actually buy ETF's and Index Funds without going through a Broker?

    From my research, I understand it is best to avoid brokers because of their fees, but I can't for the life of me figure out how to buy without going through a broker.

    Do I have to purchase a fund from say 'Vanguard' which already diversifies across a number of Indices? Or can I personally buy into and individual index like the iShare SnP500 Index through another source?

    Is it possible to do the buying and selling of index's, funds, ETF's etc by myself or do I always have to go through a firm, broker, company etc?

    As I said, I am very new to the investing world and any advice would be most appreciated.
     
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    No - there are plenty of online brokerages offering online platforms for buying and selling shares ... ever heard of Commsec?

    The only time you need a "full service" broker is if you want advice prior to trading.

    Brokerage comparison:
    All the big-4 banks offer online share trading platforms, plus others such as CMC, Bell Direct, HSBC and Macquarie.

    ETFs are bought just like any other share via one of these platforms. Some ETFs are essentially index funds - so again, if you want to invest in an index fund you can just purchase shares in an ETF.

    Alternatively, if you're looking to invest regularly via savings plan and do "Dollar Cost Averaging (DCA)", it can be cheaper to invest directly in a managed fund - there are index funds you purchase units in directly via the fund manager - no broker required. Vanguard are one example of a company offering low fee index funds.

    I wrote an article about the cost of ETFs vs managed funds when making regular (monthly or quarterly) investments: Costs of ETFs vs Funds for DCA
     
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  3. twisted strategies

    twisted strategies Well-Known Member

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    welcome Sam ,

    i buy my ETFs via online brokers ( Commsec and Bell Direct .. both the budget models )

    mainly because i want to buy at opportune moments ( big unit price falls , not say every 3 months ) , buying via an online broker , also allows instant flexibility in buying decisions ( say buying QFN when you planned to buy VAS when you woke up in the morning )

    critics will argue this is style has high brokerage costs , but flexibility in timing and parcel sizes offset this ( for me ) , i rarely buy in ( more than ) $10k parcels , and would rather cautiously accumulate during price slides ( even on the same day ).

    now this style would be less suited to a person working during trading hours ( even when working i did mostly shift-work )

    the key to investing , is to make the strategy best suit YOU ( losing sleep over worry is bad news )

    always take care
     
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  4. Sam Gallon

    Sam Gallon Member

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    Thanks so much for your replies. I understand Vanguard is a very popular company for low cost index funds. The VTS looks like an especially good fund. What is the difference between purchasing something like VTS from Vanguard verse CommSec? Commsec is asking for a $29 fee straight up? Is this a joining fee or per annum/per transaction etc?

    Is it normal to purchase funds from different companies, say VTS from Vanguard and some kind Bond from Commsec, or do you generally stay with the same company so its easier to track your portfolio?

    I am looking into the All Weather strategy by Ray Dalio and am still trying to understand how to purchase the appropriate funds to make up my portfolio. Vanguard seems pretty straight forward but is there other alternatives?

    I have about $10k which I am willing to invest (30% stocks, 40% Long Term Bonds, 15% Intermediate Bonds, 7.5% Gold and 7.5% Commodities). As I am young and don't have a tonne of money, would it be wise to use Ray's strategy so early on? If so, can I purchase everything through the one company like Vanguard?

    Apologies for so many questions in the one post. I really appreciate your time and look forward to hearing from you.

    Regards, Sam.
     
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  5. Gockie

    Gockie Life is good ☺️ Premium Member

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    You're young... I'd put the 10k in stocks.
    The others won't perform well enough for you.
    Other than that, buy your Vanguard via CommSec. It should only be $29 to do the buy, and the accounts cost nothing to set up.
     
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  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    I'm unfamiliar with Ray's strategies so can't really comment.

    The key thing with choosing investment strategies is to have a clear understanding of your goals and for you to understand the nature of risk and be comfortable with how much risk you are prepared to take.

    In general, the younger you are, the more you need to focus on accumulation rather than preservation - you need to build your capital base which will take some time and then it's not until you need to rely on that capital (ie in retirement) that you start to focus more on preservation.

    However, there is an exception in that if you have specific shorter-term plans for that money (as opposed to just building wealth for retirement), then your timeframes will dictate risk in a different way.

    For example, if you are planning on saving a deposit for a house, you'd need to use a different approach than saving for retirement.

    Either way - I wouldn't be worrying about bonds, metals or other commodities until you have a much larger capital base and need to diversify your risk.

    The other factor is having sufficient buffer to help you through difficult periods (what happens if you lose your job or are unable to work for a period - what if you need a new car). Ideally, you should have a minimum of 6 months worth of living expenses available as a buffer. I'd be looking at increasing my savings and having a decent buffer before I started investing.

    When you don't have much money - you either need to just put it in the bank (high interest savings account and/or term deposits) until you can save enough to be confident to start taking risks, or you need to put it into growth assets with a long term view (5-7 years or more) and keep accumulating - that means continue to add to your investments, reinvest dividends and continue to save money that you can use to buy more and build your investments.

    Trying to diversify too much across asset classes at this age with so little capital is not going to achieve much.

    When you don't have much invested, I don't think it's going to matter much.

    Once you have a larger portfolio you may want to consider diversifying across different fund managers to reduce the risk element that fund managers introduce - but when buying low cost index funds - they are largely mechanical in nature (ie a computer tells them when and what to buy and sell based on movements in the index), so there's not much for the manager to get wrong (fraud notwithstanding - which is why I'd generally recommend stay with the larger more established players such as Vanguard).

    As a good simple place to start - consider an ASX200 or ASX300 index fund from someone like Vanguard. No brokerage fees (there are buy/sell fees and annual management fee) and easy to manage, plus you can use BPay to add to your investment as little as $100 at at time.

    Vanguard Index Australian Shares Fund (ASX300 index fund) 0.1% buy/sell spread; 0.75% annual management fees; minimum initial investment $5,000; minimum additional investment $100 by BPay.

    For small investments, a managed fund is a lot cheaper because brokerage can be expensive when dealing with small purchases.

    If you're more likely to do larger purchases rather than regular smaller purchases, then brokerage becomes less of an issue and you could start to look at some of the ETFs instead - but I find managed funds easier to start with.

    (This is not advice - just a suggestion for further research).
     
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  7. Sam Gallon

    Sam Gallon Member

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    Thanks so much for your response Simon, exactly what I needed to hear.

    One Question though. Why recommend an Australian Index like ASX300 when the US Market seems to be a lot more stable . The Vanguard VTS (tracks US Market) has 0.05% which seems extremely low and has stable growth compared to the VAS which is 0.15% and seems a lot more volatile. Are there other fees that I am not aware of because it's international etc?
     
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  8. Simon Hampel

    Simon Hampel Founder Staff Member

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    Currency risk.

    If you invested your money into a USD based product back when the AUD was approaching US$0.50 and were earning, say, AU$100,000 per year in income from it (US$50,000 per year) ... then when the AUD got up to nearly US$1.10 ... you'll only be earning AU$45K from that same investment (all else being equal).

    In your case, if you invest $10,000 now when the AUD buys US$0.75, you'll get approximately US$7,500 invested in the US market via the index fund (they take care of currency conversion for you). Ignoring growth and income (assuming zero dividends paid and market stays steady, so underlying stocks are sold for approximately the same price you paid), if the AUD rises to US$0.85 and you want to sell your fund, you'll get only AU$8,800 of your AU$10,000 back!!!

    It's a factor you can't control (indeed there is a lot of debate as to whether large corporations or institutions can effectively manage their currency risk using hedging strategies - the strategies fail just as often as they work) ... so why expose yourself to that risk unnecessarily?

    The volatility of the AUD is going to cost you much more than any minor differences in structure and fees between the US and AU versions of an ETF. Also, currency version itself usually comes at a cost - you lose even more of your money as the institutions take their cut when you convert between currencies.

    Of course, currency movements can work in your favour ... if you invest in a USD based product when the AUD is high, the AUD value of that increases as the AUD drops.

    Unless you intend to move to the US and want to earn in USD to ensure you have consistent purchasing power from your income - I'd avoid investing in USD based products until you are in a position to diversify.

    VTS is a much larger fund (because the US market is much larger and more well established in regards to ETF acceptance), hence the lower MER.

    VAS has a dividend reinvestment plan, while VTS doesn't

    VAS typically pays higher income than VTS in percentage terms (in general, Australian shares tend to pay higher dividends than US shares).
     
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  9. Hodor

    Hodor Well-Known Member

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    I think this is over stated and with a little planning you will save you a lot long term through the ETF.

    From memory, currently the ETF (VAS) has a management fee of 0.15% and the retail fund is at 0.75%, or a 0.6% difference. With the minimum balance been $5,000 you are paying $30p.a. extra to start with - or two trades through an online broker like NAB ($14.95 a trade up to $5k) who is currently much cheaper for small amounts/new investors than Commsec. The ongoing fees will only make the ETF more attractive long term VS the retail fund.

    As mentioned it's a long game so worth taking that into account

    In addition to Sim's excellent post there is also additional management due to the VTS ETF been domiciled in the US - you need to fill out a w8ben every few years for tax purposes.
     
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  10. Sam Gallon

    Sam Gallon Member

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    Once again, thank you so much for your advise. What doesn't make sense to me is how can Vanguard advertise a fund like that (VTS) through the Australian market and not give away any information about currency conversion? It's seems like a massive floor? The pricing is all an AUD. I have seen some funds in USD which you can purchase in Australia and it makes sense currency conversion is going to play a big role, but Vanguard seems to advertise them in AUD and don't mention anything about having to convert to USD?

    Are there any companies offering good medium and long terms bonds? Similar to the kind of quality that Vanguard offers?

    Also do you recommend any other Index Fund ETFs like VAS that I could look into further. Most people seem to be only talking about the VAS and SP 200/300.. are there any other big ones around that I should consider ?

    My goal is to start early, make the most of compounding and build up a steady portfolio which I can eventually rely on for income.

    I look forward to hearing from you.

    Regards, Sam.
     
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  11. Simon Hampel

    Simon Hampel Founder Staff Member

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    I was specifically basing the recommendation that when starting with such a small investment, you are likely to want to try and DCA more into it (in small amounts) to help grow the investment - as per this thread: Costs of ETFs vs Funds for DCA

    This chart was done when the MER for VAS was 0.27% and based on an assumption of $18 per trade brokerage costs ... but it's still a reasonable approximation:

    [​IMG]

    When DCAing using monthly regular investment, you're going to be much better off buying the managed fund because they allow small investments for a fixed percentage fee. When making regular investments - the buy in costs make a much larger percentage of the annual costs in an ETF because of brokerage.

    Of course, you can just take a different approach and instead save up until you have more money and invest in larger chunks ... which is why I included quarterly investments - instead of investing $200 per month, you could invest $600 per quarter and save a heap on brokerage to make it essentially the same annual average cost (assuming fixed-price brokerage for the ETF rather than percentage based buy/sell spread for a fund).

    If you don't intend to DCA, then all of this is moot and yes, the ETF will be cheaper to hold.
     
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  12. Simon Hampel

    Simon Hampel Founder Staff Member

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    Mostly because it is all transparent to the investor - that's one of the nice things about investing through an Australian fund like VTS is that they take care of everything for you.

    If you read the factsheet they provide on their website - https://api.vanguard.com/rs/gre/gls/stable/documents/8263/au ... it clearly says:

    The ETF provides exposure to some of the world's largest companies listed in the United States. It offers low-cost access to a broadly diversified range of securities that allows investors to participate in their long-term growth potential. The ETF is exposed to the fluctuating values of the US currency, as there will not be any hedging to the Australian dollar.​

    The VTS PDS goes into more detail: https://api.vanguard.com/rs/gre/gls/stable/documents/8181/au

    Currency risk

    Fluctuations in the value of the Australian dollar versus foreign currencies can affect the returns from overseas investments. This is because losses or gains must be converted back into Australian dollars.

    The Vanguard US Total Market Shares Index ETF offered in this Prospectus does not hedge any of its exposure to foreign currencies.

    A weaker Australian dollar increases the value of investments held in non-Australian dollars and therefore benefits the Australian investor holding non-Australian dollar denominated assets, such as international shares. Conversely, if the value of the Australian dollar rises, the value of investments held in non-Australian dollar denominated assets will fall.

    Fluctuations in the exchange rate between when a distribution is paid on the US ETF Security and when these distributions are converted into Australian dollars by Computershare for holders of CDIs can also result in foreign currency gains and losses arising for holders of CDIs​

    If you haven't done so already, you should carefully read the PDS of any products you are considering investing in.
     
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  13. Simon Hampel

    Simon Hampel Founder Staff Member

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    A quick run through the above lists shows that there's only really VAS (ASX300) and STW (ASX200) which are broad index funds with significant funds under management ... most other funds are more targeted (eg ASX20 or ASX50 or small cap or sector specific) ... or aren't very large yet.

    Personally, I would start with a broad market based ETF (VAS or STW) as a low-risk way of getting market exposure and then once you've saved up some more, take a look at some LICs as a way of increasing your returns.

    Because you are just starting, unless you specifically want exposure to small cap stocks as well (higher risk), I wouldn't be trying to select sector-specific ETFs (eg financials vs resources vs reits) because you probably don't have enough research to help you choose which sectors and when. There's no point spreading your investment across multiple sector-specific funds for diversification when you can just get a broad market fund instead.
     
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  14. Sam Gallon

    Sam Gallon Member

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    Thanks so much Simon, I didn't even know what a PDS was, but obviously it's crucial information I need to read before I purchase an investment.

    So if purchasing an ETF based in the US is going to expose me to currency risk, are there any alternatives for investing overseas that are safer ? I feel like there must be some way around it because the US market is so strong and a lot of investors wouldn't want to miss opportunities overseas? Like how do we in Australia invest in Apple, Google Microsoft etc without being exposed to huge currency risk ?

    In regards the the 'currency change' example you provided earlier using $10,000. Would your example be an extreme? I feel like the USD is consistently becoming stronger than the AUD and the likelihood of massive change in the opposite direction of the current trend is unlikely?
     
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  15. Hodor

    Hodor Well-Known Member

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    You can purchase a US fund that is "currency hedged", hedging for currency increases your management expense ratio slightly. However, if you believe the USD is only going to get stronger against the AUD then you are paying for something that will decrease your return.

    IHVV gives you the S&P500 in a currency hedged package that is also Australian domiciled @ a MER of 0.10% (not my cup of tea so I haven't looked at it closely)
    iShares S&P 500 AUD Hedged ETF | IHVV

    I prefer to avoid hedging for currency "risk".

    The US market has had a big bull run recently off the back of the lost decade, do you believe it is sustainable?

    Ask yourself where your feelings and assumptions are coming from, are they a good base to be making investment decisions?

    Australian markets tend to pay higher dividends so the index's aren't good comparisons unless you use accumulation indexes to take this into account. We also get "franking credits" which makes investing in Australia more profitable for Australian's.
     
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  16. Simon Hampel

    Simon Hampel Founder Staff Member

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    This is a key piece to the puzzle that new investors tend to not understand.

    Franking credits is where the company pays tax at the company tax rate (30%) and then pays a dividend to shareholders from their after-tax profits.

    When you declare your shareholder's dividend on your tax return, you get a tax credit for the tax already paid (to avoid double taxing of the same money). If you're on a 30% tax bracket, you'll effectively pay no tax on that income. If you're on a 45% tax bracket, you'll effectively only pay 15% tax on the income (since 30% has already been paid). If you're on a lower tax bracket, you'll actually get a refund!!

    So low income earners actually get a double benefit from fully-franked dividends - not only do they get the income, but they also get a tax refund for the tax already paid by the company!

    These franking credits make your after-tax returns from Australian shares (and funds/ETFs/LICs which hold Australian shares) much more effective than investing overseas (assuming the same overall returns).

    Like Hodor, I don't think hedging is really worthwhile. Lots of articles about this from financial experts if you want to do more reading.

    At the end of the day, there's nothing stopping you from buying Apple shares or other US-based investments ... you just need to understand the risks and understand how the markets work and understand what the impact on currency fluctuations are going to have on your actual returns in Australian dollar terms.
     
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  17. Sam Gallon

    Sam Gallon Member

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    Thanks again Simon and Hodor for your excellent advice.

    I think I am almost ready to make my first investment.
    DCAing sounds like a great way for me to start and I will probably put 60-70% into VAS or VHY and 30-40% into a hedged fund like IHVV but need to look into hedging a little further. I understand I am new to the game and will make mistakes, but ultimately this will help me learn and improve over time.

    Before I do however I would like to know a couple of things.
    If you were to start again at say 21 years of age and had $10k to invest, where would you put it and why (assuming your goal is increase your investment at a steady rate with not a crazy amount of risk, aiming for say 10-15% return)?
    What would you do differently from when you first started?
    And over the years what are some key tips, learning curves, mistakes you could share that could benefit someone like myself starting out. "A Franked Dividend" for example is something most beginners don't know about.

    Thanks once again for all your advice, it is greatly appreciated.
     
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  18. Simon Hampel

    Simon Hampel Founder Staff Member

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    When starting, I think it's best to choose one or two simple investments and put your money in them and watch them closely to observe how the market works and how that impacts on your investment. Learning from experience. An index fund or an older LIC or two is ideal. Diversification is built in, so you won't lose all your money and you can use what you learn to become more targeted in your investing as you move forward.

    You aren't stuck with your investments forever (they don't have high transaction costs like real estate does), so you can move out of your investment if it no longer suits your goals or needs.

    If you buy and hold and reinvest all your dividends, plus add to it whenever you get spare cash to invest, you should get good overall growth in your portfolio value over time.

    One thing first though - if you have any personal debt, you should look at paying that off first - especially credit card debt or personal loans where interest rates are really high. No point investing for 10% returns when you're paying 12-18% interest on personal debt.
     
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  19. Hodor

    Hodor Well-Known Member

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    Buy listed investment companies like AFI, ARG and MLT

    Not buy any speculative crap. I believed that I had time to recover from mistakes and my income would be higher etc.Compounding is your friend and you can take better advantage the younger you are.

    Invest $10k (or whatever you have) like you would $1m.
     
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  20. Sam Gallon

    Sam Gallon Member

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    Thanks for your response. Why LICs over Low cost index funds?

    I don't really know too much about LICs but from what I have read they don't sound that amazing?
     
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