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index Fund with lowest Management Fees

Discussion in 'Exchange Traded Funds (ETF)' started by benbegg, 5th Jun, 2008.

  1. benbegg

    benbegg Active Member

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    I am interested in investing in an Index Fund (Managed) and am looking for the fund with the lowest fees. I can see that Colonial First State only charge 0.4% and Vanguard is pretty good with 0.75% sliding. I have considered ETF from Street Tracks but having to pay a broker to buy the units each time increases costs when you are investing a small amount once a week. I also have to consider that some index funds seem to have a high turnover of stocks and therefore seem to have a low level of franking credits.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    First question: which index?

    In theory an index fund shouldn't have high turnover of stocks? They are only supposed to adjust their weightings to the stocks as the weightings in the index changes? I guess some of the more complex "blended" index funds give more scope for stock churn - but that kind of goes against the philosphy of an index fund I would have thought.

    Don't forget that you will be effectively paying brokerage to a fund by way of the buy/sell spread (this is to cover the costs of buying and selling shares as people enter/exit the fund - effectively the same as brokerage, since that's what it largely goes towards paying).

    Eg. Some of Vanguard's funds have a 0.2% entry cost and a 0.1% sell cost - and given that you can get brokerage on direct shares for as low as 0.11% (for larger amounts invested), then the fund can actually be more expensive.

    However, for smaller amounts (eg regular contributions), brokerage at something like a $30 flat rate may well be a much larger percentage of the overall cost - in which case a fund charging only 0.2% no matter how small, would be more attractive.
     
  3. Waimate01

    Waimate01 Well-Known Member

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    Really an index fund should only trade when a stock enters or leaves the index (or across the board purchases when substantial new sums enter the fund).

    For a fixed amount under management, once the positions are established, they pretty much automatically follow the index. If BHP halves in value, its weight in the index drops, but so does its proportion of your portfolio.

    I have some money in the CFS "Wholesale Index Aust Share" fund, and it's very odd that they trade as much as they do. Way more than Vanguard or STW as far as I can see. I have a bunch of CFS wholesale non-index funds which are quite outrageous, and I must say I'm getting heartily sick of being stuck with a big tax bill just because CFS has been churning its funds. I was going to switch them all into the CFS index fund, but then noticed that even the CFS index fund seems to have excessive churning.

    I'd be interested if anyone else has noticed the same thing about the CFS Index Aust Share fund, or am I misinterpreting the figures?

    For those playing along at home, the effect of unnecessary churn is quite significant because at the end of the year you get a nice piece of paper from the fund manager showing how much more your investment is worth (on paper), then you get another piece of paper from the tax man wanting real cash to cover the tax on the realised capital gain (which stayed within the fund). Suddenly you have to find quite a substantial amount of real cash to cover your paper gain. All while the fund manager is busy patting himself on the back for racking up such a great gain (because you pay the CGT outside the measured fund performance).

    In theory, all that should be at an absolute minimum with an index fund. But somehow CFS seem to manage to sneak some back in.
     
  4. AsxBroker

    AsxBroker Well-Known Member

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    Hi BenBegg,

    Maybe the wholesale Vanguard option is more palatable to you at 0.34% or so.

    Cheers,

    Dan

    PS Before making an investment decision speak to your FPA registered Financial Planner.
     
  5. benbegg

    benbegg Active Member

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    Yes I am looking at Index Funds for the ASX100, ASX200 and ASX300. I have some money in Vanguard already and realize their fees are pretty good. Colonial seem to look good on the initial check of their management fees but I do notice that they have a high turnover and as such this results in a lot of tax being paid at end of financial year. I am only looking at maybe $100 a week into the fund with an initial $10,000 deposit so going through a stock broker is not an option with an ETF.
     
  6. eddyl

    eddyl Well-Known Member

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    So you pay the realised capital gain on an index fund which regularly trades its investments. If a fund realises a capital loss, which I guessing it would do over the year, as things get reweighted, do they send you a statement to claim thats as a tax deduction?
     
  7. Waimate01

    Waimate01 Well-Known Member

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    An index fund doesn't regularly trade its investments.
     
  8. eddyl

    eddyl Well-Known Member

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    I understand this, but I was off the belief an high ammount of transacting of securities was why the CFS fund resulted in a CGT bill at the end of the year.
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    No - capital losses are quarantined inside trust structures (unit trust in this case) to be offset against future capital gains.
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    mmm ... according to my calculations: Yearly Performance: Colonial First State (FirstChoice) Index Aust Share (FSF0233AU)

    ... the CFS FC Index Aus Share fund distributed around 21% income last year, 12% the previous year and 15% the year before.

    That's a lot - especially for an index fund.

    ... and according to http://www.colonialfirststate.com.au/Prospects/FS1127.pdf - they have averaged over 13% for the past 3-4 years.

    The fund objectives:

    ... and strategy:

    I would be interested to see what the distribution factors are for the ASX200 accumulation index - they may be similarly high.

    According to InvestSmart: Fund Profile - the Vanguard Index Australian Shares Fund has only returned 5 - 6% distribution over a similar period.

    There's something a bit strange about those CFS index funds!
     
  11. Waimate01

    Waimate01 Well-Known Member

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    Thanks for your observations and thoughts on that, Sim'
     
  12. benbegg

    benbegg Active Member

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    Yes it does seem strange. I have read that CFS seem to have quite high taxable distributions on their index fund at end of financial year. I also am aware that Vanguard claim they are very tax effective so I suppose even though they are both index funds they are actually managed quite differently. The 0.4% fee on the CFS fund for wholesale trusts is pretty appealing but not so much when you consider you get your capital sent back to you as taxable income. I did a compare of the fund against the ASX 200 chart and it seems to run with it pretty well.