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Concerns over ETFs and index funds

Discussion in 'Exchange Traded Funds (ETF)' started by venger0, 31st Jan, 2008.

  1. venger0

    venger0 Active Member

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    Hi all, this being my first post - many thanks to all the members who got together to form this particular forum on passive investing!!! funnily enough i've only just started reading up on this approach (just before the christmas break).. again, like others, having spent 10+ years on buying/selling, i am also coming to the same conclusion that it sure is hard to beat the index! :)

    anyway, my question is to those who have actually put their hard earned $$ into the Vanguard index funds or the broad index ETFs (eg STW):

    Worry #1
    how do you handle the risk that these funds could be badly managed? afterall, while the funds are diversified per se, we are still really putting all our eggs into one or two baskets (eg STW and IVE). So if one of these fund management truly stuff up, then we could lose a large portion of the portfolio.

    Worry #2
    does Vanguard have a brick 'n mortar shop in Perth? I have only been able to get info from their website. I guess i am a bit worried about putting $$ via an online application only...

    appreciate your thoughts and experiences...
     
  2. samaka

    samaka Well-Known Member

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    No differently than any large sum of money in another type of investment. When you compare them I consider index ETF's to be much safer. There's no internal gearing (maybe in US ones) and you know exactly what the fund is investing in.

    Can't help you sorry.
     
  3. AsxBroker

    AsxBroker Well-Known Member

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    Why don't you order the hardcopy???

    order - Vanguard Investments Australia Ltd

    Cheers,

    Dan

    PS This is general information, speak to a FPA registered Financial Planner before making an investment decision.
     
  4. venger0

    venger0 Active Member

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    thanks for the responses guys :)

    ya - agree that Worry #1 is common across any managed fund. But i guess the comparison here is method (A) directly buying a list of common leading companies (say top 10) and using that to mimic the index performance.. vs method (B) putting $$ into an index fund ...

    i'll have to see if there's a way to chart the last 10 years performance of a top 10 list vs index :) wonder if there's much of a deviation...
     
  5. samaka

    samaka Well-Known Member

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  6. FrankGrimes

    FrankGrimes Well-Known Member

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    No, but vanguard are a good company - don't stress about online only
     
  7. venger0

    venger0 Active Member

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    Hi Frank :)

    thanks! ... have you been with Vanguard for more than 3+ years?

    it would be great if current (or ex-) Vanguard members here could take the time the post their good/bad experiences with the fund :)

    Regarding cost effectiveness of Vanguard (0.75% initial) vs STW (0.286% + brokerage), my calcs suggest that STW is better only if if the parcels are in portions of $10k each - for lesser deposits, Vanguard is probably cheaper in the long run. Did I miss any potential hidden costs in my calcs?

    BTW, i just checked out that great thread a while back between some regulars (i think it was started by dkms on rejigging portfolio?) - GREAT thread... thanks for helping me learn!

    my own plan is:

    - age 35
    - LOC against PPOR $100
    - Dollar averaging in $10k parcels every 2-3 months
    - reason is so that the 1-2 year timeframe will give me time to take stock :))) of any sharp dips

    asset allocation:
    - STW 40%
    - IVE 40%
    - direct share 20% (for alpha)

    For alpha above, probably go 2-3 companies. I don't know of any small caps index in oz - is there one? .. if there is, maybe that would be a better choice?
     
  8. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Might be worthwhile thinking about not D.C.A.ing and instead holding onto your cash until those 'sharp dips' which is when the best buying opportunities are.

    Mark
     
  9. dkmc

    dkmc Well-Known Member

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    Nothing really negatively correlated there to offset
    The portfolio you suggest would probably go down a lot with a US recession
    I suggest at least adding SLF - you can get in at a good price now,
    It will also lift the dividend yield of your whole portfolio
    which is always nice

    Have you done the usual process of determining your risk profile
    how much of a drop you a willing to take
    etc

    What about going to see a Fee For Service financial planner
    For a small sum - it would really give you peace of mind

    Re small caps index
    DFA - small - has a tilt toward them
    CTN - is an LIC not exactly an index for small caps

    if you are using an LOC for funds
    then you realise you are an aggressive investor aiming for max growth
    Are you comfortable with a 30%+ drop
     
  10. dkmc

    dkmc Well-Known Member

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    Also emerging markets - gives good return, and reduces the volatility of your portfolio

    You want to optimise return, reduce volatility, and keep fees low
     
  11. Rod_WA

    Rod_WA Well-Known Member

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    I've had Vanguard High Yield Aus Shares since Aug 2005, and had their International Shares (hedged and unhedged) for a couple of years.

    I reckon Vanguard are fantastic. The focus on after tax returns is against the traditional fund grain, focussed for the investor. The online site is responsive, and the mailed doco is very clear and often a good read.

    I highly recommend Vanguard as a reputable company.

    The only concern is the fees, and you compared them with the SPDR listed ETF. If you ignore brokerage for STW or the buy/sell spread for Vanguard, the 0.5% difference will tend to compound. At $10k invested, the difference is only $50, but as the fund grows, 0.5% of $20k is $100 and so on.

    But if you intend to invest a small amount each month, then the brokerage will bite into the ETF.

    Having said that, I personally think the Vanguard fees are justifiable. I'm a fan.
     
  12. venger0

    venger0 Active Member

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    thanks dkmc,

    anyone know any good FPs in Perth?

    .. ya, my plan is aggresive .. but i am trying to temper it with DCAing, and also other measure.. also why i will not use margin loans..

    .. what ETFs or fund will cover emerging market?..

    .. won't SLF be just as vulnerable to a US recession?

    thanks Rod_WA,

    will certainly read up more on Vanguard...
     
  13. dkmc

    dkmc Well-Known Member

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    travis morien is in perth - Id highly recommend getting real advice

    emerging market- DFA have a fund
    Emerging Markets Trust


    I think vanguard wholesale have one
    Index funds - Vanguard Investments Australia Ltd
    But for institutional investors - you may be able to access them via a wrap
    though costs are higher

    Vanguard also have international small

    Ishares have IEM for emerging markets

    Yes SLF wont escape a US subprime lead recession
    But its getting to the point of good fundamentals-
    high yields
    its already dropped 25-30%
    It may have a bit to go - but it is certainly better value than 6 months ago


    You may want to tilt things toward asia - but thats up to you to decide

    Since you are using borrowed funds - anything with <10% long term growth is out
    Expect your portfolio to be volatile and accept that

    Perhaps something thats more recession proof and negatively correlated is direct property - thats certainly been how my portfolio has been - my direct property has gone up a lot, despite the falling share market

    Id be more comfortable setting up a portfolio with about 5-7 funds, with good reasons behind choosing them. See my posts in the rejigging thread to see the graphs of the funds I chose and why
     
  14. dkmc

    dkmc Well-Known Member

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    Im not sure how FFS advisors have factored in ishares
    Perhaps MJROSS can elaborate

    Ideally we could setup a portfolio based on SPYDR ETFs and ishares
    with no wrap fee
    Though it would be harder to report on
     
  15. dkmc

    dkmc Well-Known Member

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    Im unclear whether you are using a full indexing portfolio approach
    or just buying some STW / vanguard

    You say you are using some other measures - do you mean trading the ETF a bit, stop losses etc

    I wouldnt be worried about vanguard
    It probably is more successful and bigger than anything in australia
    about us - Vanguard Investments Australia Ltd

    You dont sound like you are in a postition to feel comfortable with investing
    this money
    Only invest when you are clear on all the reasons why you are investing, and have a plan for when the market drops 20% what you are going to do.
    Go read a lot more, or find a planner
     
  16. Norak Bastiat

    Norak Bastiat Well-Known Member

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    I'd advise against this. How do you know when it will bottom? Just put in a fixed amount every x days, x being larger the more risk tolerant you are.

    IVE=EAFE countries (Europe, Australia, and Far East)? Any exposure to the US? Or emerging markets?

    IEM is iShares Emerging Markets ETF. Tracks the MSCI Emerging Markets Index.

    DFA is only for those invited. Vanguard Emerging Markets Fund requires I think $500,000 for access. Fine if you're rich, but otherwise, I'd go with IEM.
     
  17. venger0

    venger0 Active Member

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    thanks dkmc,
    yes - my plan is to set up an index tracking portfolio. Have been reading up a lot of J C Bogle-related books.
    Asset allocation (esp. the modern portfolio theory-kind) is very new to me. I am still trying to learn about how to put one together. Glebe's EFT-based alternative in your rejiggin thread looks like a good starting point. But am looking for books on the subject matter before proceeding. Have also scheduled meeting with an FP to review my plan :)