Join our investing community

info re Index Funds wanted

Discussion in 'Exchange Traded Funds (ETF)' started by lancer24, 12th Aug, 2008.

  1. lancer24

    lancer24 Active Member

    Joined:
    30th Jun, 2008
    Posts:
    25
    Location:
    Sydney, NSW
    Hi Guys,

    I am 27 years old with 16K sitting in a high interest savings account. 16K, its not much I know. a dud of a car i bought last year wiped out 10k of savings in repairs etc. ouch, that hurt. :( lesson learnt.

    Have finally decided its time to start a longterm investment.looking at Index Funds and ETFs mainly.

    Besides Vanguard are there any other Index funds available in the australian market ?

    Was thinking of opening a wrap account with netwealth, to get access to wholesale index funds mainly the emerging economies and small cap from vanguard. As this is a longterm investment, 10 years plus, I don't mind the volatility associated with these. But was wondering if there were index funds from other outfits aswell.

    I save about 1000$ per month, and will be looking to make monthly contributions, so don't think ETFs are the way to go yet.

    any advise would be helpful. :)

    cheers,

    Jay
     
  2. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    I have opened an account with netwealth recently and have been very happy with their service to date. Its so easy to open new managed funds, their investment menu is very broard, they give you 0% entry and exit, and I have noticed that one of the funds I'm in they are rebating the planner trailing comission.

    I also strongly believe in regular monthly contributions, so as you dollar cost average your way into the market.

    If your looking at lowering your risk, look at some of these funds, although they arent index funds. Orchard Direct Property trust, AMP global Infrastructure trust, these two funds run seperate to the stock markets and have held up very well during this market crash. I wouldn't expect them to have booming returns either in a bull run, but will lower the volatility of your portfolio.

    I have also invested into Colliers global property securities fund, its returns were very good up until the property crash, but now I view this sector as oversold, and a great time to build up a position in it.

    I have decided not to invest into australian listed property, due to it relying on a small amount of companies, and one goes down, in this case centro, the whole index crashes.. global property has a far broarder menu of stocks to invest in.

    I have also invested into australian and international share funds.. personally I think international will perform better than australian, due to commodities cooling off, hence our dollar falling (plus our falling interest rates will make dollar fall)

    So its important to have international exposure now.. part of a balanced investment portfolio..
     
  3. vandalic

    vandalic Active Member

    Joined:
    2nd Jan, 2007
    Posts:
    35
    Location:
    Brisbane, QLD
    There are also some great ETF's on the ASX.

    I'm in the S&P 500 Index (ASX Code: IVV), Emerging Markets (ASX Code: IEM), and ASX 50 (ASX Code: SFY) and ASX 200 (ASX Code: STW) funds myself.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    You need to do the sums ... most managed funds have a buy-sell spread of around 0.15/0.15 to cover brokerage costs for transactions.

    This essentially means that if you can get brokerage for an ETF at 0.15% or less, then it is at least as cheap as a managed fund (although automatic monthly investments aren't quite as easy).

    It would all come down to who your broker is and how much you will be investing each month.
     
  5. lancer24

    lancer24 Active Member

    Joined:
    30th Jun, 2008
    Posts:
    25
    Location:
    Sydney, NSW
    Thanks crc,

    I hadn't looked at Infrastructure funds before, but will now consider them.

    Had been thinking abt australian listed property, but agree that its a very small pool of companies. Global properties would be more stable. hopefully.:rolleyes:

    I had originally been thinking about splitting my 16K as below and taking out margin loans across the board and gear it to the maximum.

    Global Equities Index / ETF: 4 K
    Australian Equities Index / ETF: 2 K
    Emerging Markets Index / ETF: 4 K
    Properties Securities Index : 2 K
    Small Cap Index / ETF : 3 K
    Cash : 1 K

    As I am looking to take margin loans on the above, which makes it risky and aggresive :D , decided to hold 1K in cash as well. May look at the infrastructure fund to reduce the volatility.

    I havn't really checked if I will actually get a margin loan against my small amounts.

    also, are there any value index funds out there? I know that DFA have them, but they are by invitation only. And I can't really be bothered going to a financial planner. don't have the money to spend.

    I will probably go with Netwealth. I had looked at InvestSmart as well, but they don't seem to have wrap accounts.

    Also, has any one looked at YourShare - managed fund and using them ?
    they rebate 100% of entry fees on new investments & contributions and 50 % -70 % of trailing commissions including Netwealth Wrap accounts.
    I had a look at their Cash Rebate calculator, they make a strong case speically in the long run.
    Is anyone currently using Yourshare ?
     
  6. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    lancer24, I like your mix. I would re-consider the australian listed property index allocation. Only because I consider listed property a sub-section of australian shares. Its like allocating $x into say australian financial or australian retail. Your australian shares will cover those listed property companies. I think your looking at a property allocation, and I think colliers international listed property would give you better diversification.

    Alternatively consider one of the unlisted australian direct property trusts, like cromwell or orchard. You will see these two funds have held up quite well, but didn't have the exciting returns as say australian shares.. Your buying the actual buildings, and collect rent, unlike listed property trusts where your buying essentially property management companies with loads of debt!

    I like the AMP global infrustructure, it has a holding of 50% unlisted infrustructure assets and 50% listed assets. This fund is not corrolated to stock markets.

    Be careful of gearing to the max, as I got slaughted when the market dropped earlier this year.. I was in UBS australian listed property fund, which lost 50% in value, and I had it geared at 60%! so that money got wiped out!

    I also think I wasn't diversfied enough, thats why I have looked at alternative assets like unlisted property trusts and global infrus funds.. I also considered hedge funds as they also have a low corrolation to stock markets, but haven't invested into one as yet. Mainly cause I don't believe in the long run their performce will be great, due to their high brokerage costs and high MER's to run the funds.
     
  7. lancer24

    lancer24 Active Member

    Joined:
    30th Jun, 2008
    Posts:
    25
    Location:
    Sydney, NSW
    I am aware of iShares and SPDRs and was thinking about investing in IEM & IZZ ( China 25 ) and STW aswell. I am not sure of how liquid iShares are though, they being a new product in australia.

    I was thinking of using either Commsec or InterractiveBrokers for purchasing ETFs. Commsec is more expensive at 20$ per trade. Interactive charge just $ 6 for each trade ! Has anyone here used Interactive.

    Looking at how I want to split my 16K, and that I want to make monthly contibutions (1000$ max into any one asset ), I am not sure ETFs would make a good alternative.

    montly : 6 / 1000 = 0.6% , i.e. assuming i put a total of my monthly saving into one ETF.
    Have I got this right ? :confused:

    I may have to make up spreadsheet to compare holding and entry and exist cost for monthly contributions for index fund vs ETFs.:(
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Yeah, pretty much I'm afraid.

    Assuming the funds you are considering have a buy-sell spread of 0.15%/0.15%, then you need to have your brokerage cost less than this. Brokerage is usually a fixed cost up to a point, and then a percentage of amount purchased/sold.

    So if brokerage is $6 (which is surprisingly cheap), then you need to be investing at least 6/0.0015 = $4000 each time for it to be cheaper than a managed fund.

    If brokerage was $20, you need to be investing $13.3K with each trade for it to be cheaper than the managed fund.

    So based on these quick sums - assuming the other management costs of the managed fund aren't about the same as the ETF, then the managed fund will most likely end up cheaper overall.

    ... but you do need to look at those other costs ... if the MER for the fund is much higher than that of the ETF, you may well be worse off anyway (assuming we are comparing a fund and an ETF which invest in the same index with largely the same results).

    At the end of the day - I wouldn't worry about it too much, unless there is a huge difference in management fees. If the managed fund with their automatic monthly investment plan is easier to use than an ETF, then just do it.
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Here's some examples to look at ... although they aren't investing in exactly the same market, they are pretty close:

    Vanguard Index Australian Shares Fund | Fund profiles | Vanguard

    Purchase cost: 0.20%
    MER: 0.75% p.a. up to $50,000

    SSgA: SPDR S&P/ASX 200 Fund

    Purchase cost: brokerage
    MER: 0.286%

    So, let's use a figure of $1000 per investment.

    Vanguard, purchase cost = 1000 * 0.002 = $2
    Management cost = 1000 * 0.0075 = $7.50

    Total per $1000 in first year = $9.50, and then $7.50 per year (or $77 per $1000 after 10 years)

    STW, purchase cost = $6 or $20 (depending on which broker)
    Management cost = 1000 *0.00286 = $2.86

    Total per $1000 in first year = $8.86 or $22.86, and then $2.86 per year ($34.60 or $48.60 per $1000 after 10 years, depending on brokerage).

    ... so as you can see, the lower MER for STW makes is quite a bit cheaper over the long term!

    The MER is generally much more important than the up-front costs overall, unless you are investing very small amounts of money each time. If you were only investing $100 at a time, I would say don't use an ETF - the brokerage is just too high.

    If you can find a good index fund for lower MER, then it might be much more competitive.
     
  10. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    I think your spending a little to much time on analyzing the fees. Your only investing $16,000. say your able to save 1/2% on MER, then thats a whole $80 per year you will save. If your so worried about that $80 per year, stay home 1 saturday night a year, and you will save the $80.

    Other funds to look at are the UBS funds, they have low MER as well.

    Find a Managed Fund

    The Australian Share fund for example has a MER of 0.8%
     
  11. lancer24

    lancer24 Active Member

    Joined:
    30th Jun, 2008
    Posts:
    25
    Location:
    Sydney, NSW
    Thanks Sim,

    Your examples explained the fee structure very clearly.

    I understand the importance of lower MER for the long run now.

    I will probably go in for a mixture of Index funds and 1 or 2 ETFs after researching a bit more.
     
  12. lancer24

    lancer24 Active Member

    Joined:
    30th Jun, 2008
    Posts:
    25
    Location:
    Sydney, NSW
    CRC you are right re the Australian Prop securities being a subset of the overall ASX index. I will invest in global properties something along the lines of colliers. :)

    yeah well, i work as an analyst, details and numbers work for me :D

    Besides the initial 16K, i plan to contribute $1000 each month to DCA. so the fees re the additional contributions will make an impact, specially since I am investing for a 10 year plus time frame. I have got 40 years till retirement, so all these costs will add up over time.


    this is actually a learning curve for me. i have read a number of books on financial planning and investing strategies inlcuding a randow walk along wall street.

    but i never really understood the maths behind the fee structure and how it impacts in the long run. but thanks to this forum, i am beginning get a a good understanding.

    thanks guys for guys for the good work.
     
  13. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    Fee's do definatly reduce your performance. Especially over the long term. The other thing when you look at those examples which show how you save $15000 in 30 years time etc, remember $15000 in 30 years time is going to be a very small amount.

    If you can get exposure to the asset classes via index fund, then I think they are a very viable option. I think index funds are better than those large titanic fund managers who essentially only follow the index. I elected to choose smaller fund managers owned and managed by the person making the investment decisions, (and has their own money invested with yourse) who have outperformed the market over a 5 year period. But investing into the colonial first state australian share fund, will only follow the index, and you may as well invest into the index with lower fee's.
     
  14. Jess

    Jess Member

    Joined:
    22nd Jul, 2008
    Posts:
    14
    Location:
    Sydney
    Hi

    I work for InvestSMART and we offer BT Wrap, Macquarie and a few others, or if there is a particular Wrap account you are interested in we can assist you in going into that Wrap product if you let us know which one you would like to invest in.

    Cheers

    Jessica
     
  15. Norak Bastiat

    Norak Bastiat Well-Known Member

    Joined:
    16th Sep, 2007
    Posts:
    66
    Location:
    Melbourne
    I'd go with STW since it has low management fees of 0.29 per cent, which beats most traditional managed funds. However, maybe it's cheaper to just buy individual shares in the top 20 Aussie companies and weight how much you buy according to market cap? You won't have to pay management fees, which can be high if you invest a lot, and you will still replicate the index reasonably. Personally I wouldn't buy an index fund for Aussie shares in big companies because these companies' shares are so easy to buy cheaply with, say, Commsec. However I would use ETFs for foreign shares, small companies, etc.

    If you save $1000 per month, that is not a problem. Just save it up in a savings account until you have about $4000 and then buy then.

    Furthermore, I agree with CRC Error and would caution against investing only in Australian shares. Look at iShares and buy some foreign share ETFs. Why? Because the Australian dollar can collapse (in the last few months the Aussie dollar collapsed by about 40% against the US dollar) and having some foreign shares can give you currency diversification. When one Aussie dollar purchased 98 US cents I bought exposure to foreign companies like those in the US. Now that one Aussie dollar only buys 62 US cents, dividends from those US companies coverted back to Aussie dollars gives me much more.

    I think iShares has market makers who create artificial liquidity.
     
  16. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi Lancer,

    You'll find that the idea of indexing is not to make investment choices about investing in value or growth shares but to own them all, in line with the index it is trying to replicate. Some fund managers may have tilts, eg, high yield, value, growth, etc though it isn't "real" indexing...

    Cheers,

    Dan

     
  17. lancer24

    lancer24 Active Member

    Joined:
    30th Jun, 2008
    Posts:
    25
    Location:
    Sydney, NSW

    Ok, Dan , I get your point. Will reword, my question. Are there are value style funds out there ? I know only of DFA and Hunter Hall.
     
  18. lancer24

    lancer24 Active Member

    Joined:
    30th Jun, 2008
    Posts:
    25
    Location:
    Sydney, NSW
    Hi Norak,

    I have been thinking along the same lines. I would use ETFs mainly iShares only to buy in Foreign markets. I am looking at IZZ ( China 25 ) and IAA ( Asia 50)

    For Aussie shares, I am thinking of buying CBA, Wespac, BHP mainly. And maybe buy into a LIC like Agro.
     
  19. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi Lancer,

    There are heaps!!!

    Approximately a third of all the fund managers are Value style (compared to Growth and Core/Neutral).

    AXA have a few value funds;
    Tyndall is also value
    Perpetual is value
    Schroder have a global value fund

    Van Eyk actually classify fund managers into their investment style which will make it easier to find out :)

    Cheers,

    Dan

    PS This is general information. Before making an investment decision speak to your FPA registered Financial Planner.