info re Index Funds wanted

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

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..

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.

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.

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.

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 , 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 ?

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.

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 ?

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

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.

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.

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%