Investing in Vanguard Australia - ETFs or Retail Managed Fund?

[Antipodean]

I am shifting to Australian in mid-January after living in New Zealand for 8 years.  I am bringing most of my savings across of about AUD$50K back with me and plan on saving the mustachian minimum of 50% of my after-tax income - approximately $19,500.

I have been looking at using Vanguard Australian but not sure which is best approach.  I am considering 2 options:

First Option: deposit the $50K into one of the Vanguard Retail Managed Funds - the High Growth LifeStrategy Fund https://www.vanguardinvestments.com.au/retail/ret/investments/funddetailHIG.jsp

   Pros: Instantly diversified across Australian, International Shares, Property Securities & Fixed Interest
            Easy to make regular investments via direct credit from my internet banking site (Bpay)

  Cons: Annual Fees on the first $50K are 0.9% pa (although this decreases to 0.6% for balances between $50K & $100K and finally to 0.35% for balances over $100K)
           Buying costs are 0.19% so a regular fortnightly contribution of $740 would be approximately $14

Second Option: set up a online sharetrading account (possibly with NAB trade which charges $14.95 for trades up to $10K) and purchase 3 or 4 Vanguard ETF

       For Example: 40% VAS - Australian Shares Index (top 300 companies which covers over 90% of the market) - annual fees 0.2%
                           20% VTS - US Total Shares Index (covers over 99% of the US market) - annual fees 0.06%
                           20% VEU - All World excluding US (covers 46 developed & emerging markets outside US) - annual fees 0.18%
                           20% VAP - Australian Property Securities (REITs) - annual fees 0.25%

        Pros: lower annual fees than the managed fund option, more control over which asset classes are invested in.

        Cons: can't automate regular investments,  additional purchase of under $790 ($790 X 0.19% = $15) would be more expensive than investing via the first option.

Any suggestions on which would be a better option?  Anything I have missed or any suggestions on how to set up and making regular investments in Australian Index Funds (not limited to Vanguard) would be much appreciated.

[happy]

Sorry, I can't help with Vanguard advice, but I've posted just to say make sure you check out the rules/benefits of superannuation www.ato.gov.au, since that is the most tax sheltered investing here. At your salary level you could be eligible for a government co-contribution: I don't know if makes a difference if you are a temporary or permanent resident. Maximum contribution per year at the tax concessional rate (15%) is $25k, after that you will pay 47c/$1 as a penalty rate. It makes sense from a tax sense, to "max out" your super in the same way the Americans do with their retirement funds.

If you are a temporary resident leaving you can take your super with you: I don't know how that effects the tax arrangements though.

The downside  (and its a biggy) is that you can't get the money out until 60 years of age ( or a bit younger if you are born before 1964).

[marty998]

You've got a number of options - but my first piece of advice is to find a way to boost that income.

Have a look at some of the listed investment companies out there. AFI, Argo, Milton etc. Some even are long/short funds such as ALF.

Then you've got listed ETF's such as STW. But I think for regular monthly investing of small amounts you are not going to beat vanguard for costs

[Antipodean]

Very sound advice marty - re-negotiating my salary once 6 month contract ends is one thing I know I will need to do!

I have looked some of the listed investment companies - AFI has only 0.17% management fees and paying fully-franked dividends are definitely pluses.

But I think for regular investing of small amounts I agree I am not going do better than Vanguard.

[bigchrisb]

All sound advice so far!

I'm assuming that your after tax income is $39k, and you are saving $19.5k? i.e. fortnightly you will be

I'm in Australia and use some of these investment vehicles.  My savings rate is a bit higher (typically buying >$5k at a time), so for me it was a no-brainer to go for the listed versions.  I'm also of the view that if you are holding investments for a long haul (and lets be honest, that's what we plan for index investments, right?), you want to try to drop those annual costs.

My current portfolio is about 40% direct stocks (16 individual ASX50 stocks), 10% direct (5 direct REITS), 10% US ETFs (IVV and VTS), 10% rest of world ETF (VEU) and 20% LICs (AFI, ARG, MLT, BKI, CIN).  I have also had VAS, STW, IVE and IEM in there in the past.

My personal preferences and rationales:

Australian shares:  I preferred VAS over STW, as it had a lower expense ratio, and was slightly broader (ASX300 vs ASX200). However, at the moment, I've preferred the LIC's, as they have been trading at a discount to the shares they own.  This isn't always true though, at times they trade at a premium.  I take the view that if the LIC's are trading at a discount, I'll buy them,  If they are trading at a premium, I'll but the ETF (who's market makers keep it in line with the NTA).  For a while I was buying individual large cap stocks, as I figured I'd rather keep the 0.15% MER of an ETF.  However, the admin of dealing with that many individual holdings makes me think twice now.  Furthermore, if you can buy the same portfolio at a discount (CIN for example currently costs $19.85 for a basket of shares worth $23.05, see http://www.asx.com.au/documents/products/LIC_NTA_Report_November_2012.pdf for the monthly premium/discounts of LICs as published by the ASX), the market exposure of that extra 16% of shares more than makes up for the 0.12% management cost.  Note that VAS includes some REITS (7% by weight), so if you want 20% exposure to REITS, then you can hold slightly more VAS and slightly les VAP (and pay 0.1% less MER on that portion).

International shares:  I swapped from a mix of IVE and IEM to just holding VEU a while back.  My rationale was that I could harvest a capital loss, and the expense ratio was lower. I've been wondering about direct international shares - partially because I don't understand what happens to the franking credits of the Australian shares within ETFs like VEU.  It seems that these get lost?

All my personal opinion and not investment advice.  All the best with whatever you choose to do!

[Nudelkopf]

..plan on saving the mustachian minimum of 50% of my after-tax income - approximately $19,500.

Is that your income that $19,500, or your savings? Cos if that's your income, then I'm very impressed!! Because that's equal to my rent :(

[Antipodean]

Hi Nudelkopf - My savings is $19,500 per annum currently or $735 per fortnight.

I decided to go through the Vanguard Managed Fund rather than the ETF for now as it simply to make regular fortnightly contributions via Bpay (direct credit).  I choose the High-Growth Option as it does the asset allocation for me.

Up to my 3rd fortnightly contribution now so it is on track.

Using ETF and LIC I can see the appeal once I have built enough captial.

These also sound like great options to use in Self-Managed Super funds.

Does anyone use them for this purpose?

[MichaelR]

I have been looking at the fees for Vanguard Australia and they are considerably higher than the fees for the mutual funds in the US.

Be careful that you are really getting value for money and don't be mislead by the Vanguard name.

The Vanguard fund tracking the S&P500 in the US has an expense ratio of 0.05%, but the Australian funds go from 0.6% for the first 50-100,000 invested and to 0.3% for the remainder.

[sidesh0w]

I have been looking at the fees for Vanguard Australia and they are considerably higher than the fees for the mutual funds in the US.

Be careful that you are really getting value for money and don't be mislead by the Vanguard name.

The Vanguard fund tracking the S&P500 in the US has an expense ratio of 0.05%, but the Australian funds go from 0.6% for the first 50-100,000 invested and to 0.3% for the remainder.

all true.  unfortunately, they're still amongst the cheapest available, the expense ratios here are much higher than in the US.