ETF or Index Mutual Fund - Help me decide (Aus)

[quidgy]

Hi all,

I've signed up here recently after being a lurker for a little while. I'm a pretty new investor and have learnt a lot reading as much as I can. There's a lot of great information here but I still cannot decide between the two investing options I've narrowed down.

ETF or an indexed mutual fund, probably provided by Vanguard.

I'm on a reasonable salary and can afford to save/invest up to $350 per week whilst still covering bills and living reasonably well. I'm still talking my partner around to the idea of investing - the idea of losing money on the market scares him, but we've agreed that as long as I keep $10,000 in cash, I can invest in the market.

I know through an ETF I would incur a brokerage fee ($20, I'm using Commsec) so if I chose this option I would minimise the number of purchases so that the interest and earnings on my savings account is outweighed by the earnings potential less fee of investing. With a mutual there are more ongoing fees, but once I've bought in I can reinvest often and regularly.

So, do I save the $5000 minimum to buy into Vanguard, or do I plunge into ETFs when I have accumulated, say, $1000?

About Me:
- 29
- No debt
- Renting
- $3000 already in an ETF (VTS on the ASX), $1000 directly in a stock (IAG on the ASX)
- Will rebalance once appropriately diversified but will not actively manage my portfolio.
- Will invest on a regular basis

[frugaljo]

Greetings Quidgy,
good questions I have been wondering about this myself, I found get article on it http://cuffelinks.com.au/caveat-emptor-lics-versus-etfs/ that made me think maybe Managed funds are better for me right now (wanting to add $100-500 here and there, yes slightly more fees but clearer distribution structure etc) and yes it will be vangaurd. I am thinking the property trust one, as my super went up 25%+ over past year in property and I if interest rates are going down and Australians are inlove with property there is more opportunity for growth.

which specific managed fund/eft are you looking it?

[quidgy]

Thanks for the reply frugaljo,

If I go down the path of ETF I will go for a mix of these I think: VTS, VAP, VGB, VHY (or VAS). To get a good mix but avoid excessive trading costs I am going to need to invest about $1600 minimum per trade (as calculated using the spreadsheet formulas recorded here http://money.stackexchange.com/questions/30734/frequency-of-investments-to-maximise-returns-and-minimise-fees/30774#30774).

As for mutuals, I can't decide if I should go with Vanguard's already diversified funds, such as the Growth or High growth, or if I should get a range of funds starting with the Vanguard® Index Australian Shares Fund.

[Murdoch]

Hi Quidgy

There was a recent thread on this same question only last week. Scroll down this thread list and check out some of the answers.

I recommended the Vanguard funds over the ETF's.

Main pros:
- simple
- does all diversification for you
- does all the balancing for you
- costs nothing to add more money and money can be added in $100 increments (this will suit your plan)
- no middle man as you deal direct with Vanguard Australia
- if you are prone to fiddle with your investments, this options keeps you on the straight and narrow as you can't market time if your only fund is a cheaply run index fund with broad diversification

Main cons:
- cost slightly more (the value of doing the work yourself in terms of buying and balancing increases as your portfolio increases)
- if you want a balance of international/domestic/property etc that is not reflected in one of their specific funds then you either do it yourself or take one of the offered options

Good luck, I'd personally hold out till you had 5K to start a Lifestrategy fund.

Murdoch

[quidgy]

Hi Murdoch,

I did look for other similar threads for Australians but couldn't see anything other than the massive Australian investing thread. I've gone through some of that but there's a LOT of information to get through.

Thanks for your advice though. I am leaning towards a Vanguard Fund I think. I do have concerns that I'd be investing in the same or similar assets that my superannuation is investing in though.

[Murdoch]

Hi Qidgy,

I also gave up on that super thread haha.
Here is a link to the one I was talking about.

http://forum.mrmoneymustache.com/investor-alley/australia-vanguard-etfs-v-lifestyle-strategy-fund/

Cheers
Murdoch

[steveo]

I look at the fees and I think they are too high within the lifestyle strategy fund. I like the convenience of the strategy fund though.

[qwerty8675309]

Hi Quidgy, welcome to the forums!

First of all, don't underestimate the effect of fees on your investments. I was in the same boat as you 10 years ago - I had read a ton of forum postings about where to invest my money. At the time, my choices were to invest in the only ETF listed on the ASX (ticker: STW) with 0.286% p.a fees. It tracks the ASX200 index. My other option was to put my money into a Vanguard LifeStrategy High Growth Fund with 0.90% p.a in fees. After sleeping on it for a few days, I decided to go with the Vanguard High Growth Fund because it was more diversified (it had international exposure in addition to the exposure to the ASX300)... but then after a few years of investment experience, I decided to read a few good books by the Vanguard founder, Jack Bogle (this is sort of ironic). He posits that there are two major drivers for investment performance - Asset allocation and fees. He illustrated how even a small difference like 0.5% in fees could have a massive impact on the fees you pay during your investment lifetime. To illustrate, take an example of $10k invested in a low cost ETF compared to the Vanguard LifeStrategy High Growth Fund using a calculator provided by MoneySmart:

https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/managed-funds-fee-calculator

Investment Amount: $50000
Investment Earnings: 8% p.a
Low Cost ETFs offered by Vangard (eg, VAS, VTS, VEU) fees p.a: 0.15%
Vanguard LifeStrategy High Growth Fund fees p.a: 0.9%
Investment Time Horizon: 30 years

Over an investment time horizon of 30 years, you've paid $118,426 in fees for the Vanguard LifeStrategy High Growth Fund, with an ending balance of $380,706. If you had invested in one or more low cost Vanguard ETFs, you would have paid about $22,002 in fees, with an ending balance of $481,131. Such is the grand power of low fees and the insidious effect of high fees over long investment horizons!

The other thing I would mention is the the optimal investment amount that you've worked out ($1600 per trade). This seems kind of low to me (typically I invest in $5-10k increments), but I won't pretend to have any idea how that stackexchange link works it out. Keeping this in mind, there are a few suggestions:

- Lowering your brokerage cost with a cheaper broker will help you minimise investment costs. The cheapest one that I can find is CMC markets, at $11 per trade
- There is an associated opportunity cost for not being invested in the market (ie, you miss out on the gains), but you can save the money in a high interest savings account until you have your magic investment amount. I currently do this with an ING savings maximiser account, which offers a 4% p.a interest rate.
- There are generally high buy/sell spreads for ETFs with low volumes (the difference between the price you can buy a stock for and the price you can sell an stock for). This is worth factoring in if you choose to investing in ETFs that aren't very popular.

[quidgy]

Thanks for the replies everyone,

Hi Qidgy,

I also gave up on that super thread haha.
Here is a link to the one I was talking about.

http://forum.mrmoneymustache.com/investor-alley/australia-vanguard-etfs-v-lifestyle-strategy-fund/

Cheers
Murdoch

Thanks! Lots of good info there.

Hi Quidgy, welcome to the forums!

First of all, don't underestimate the effect of fees on your investments. I was in the same boat as you 10 years ago - I had read a ton of forum postings about where to invest my money. At the time, my choices were to invest in the only ETF listed on the ASX (ticker: STW) with 0.286% p.a fees. It tracks the ASX200 index. My other option was to put my money into a Vanguard LifeStrategy High Growth Fund with 0.90% p.a in fees. After sleeping on it for a few days, I decided to go with the Vanguard High Growth Fund because it was more diversified (it had international exposure in addition to the exposure to the ASX300)... but then after a few years of investment experience, I decided to read a few good books by the Vanguard founder, Jack Bogle (this is sort of ironic). He posits that there are two major drivers for investment performance - Asset allocation and fees. He illustrated how even a small difference like 0.5% in fees could have a massive impact on the fees you pay during your investment lifetime. To illustrate, take an example of $10k invested in a low cost ETF compared to the Vanguard LifeStrategy High Growth Fund using a calculator provided by MoneySmart:

https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/managed-funds-fee-calculator

Investment Amount: $50000
Investment Earnings: 8% p.a
Low Cost ETFs offered by Vangard (eg, VAS, VTS, VEU) fees p.a: 0.15%
Vanguard LifeStrategy High Growth Fund fees p.a: 0.9%
Investment Time Horizon: 30 years

Over an investment time horizon of 30 years, you've paid $118,426 in fees for the Vanguard LifeStrategy High Growth Fund, with an ending balance of $380,706. If you had invested in one or more low cost Vanguard ETFs, you would have paid about $22,002 in fees, with an ending balance of $481,131. Such is the grand power of low fees and the insidious effect of high fees over long investment horizons!

The other thing I would mention is the the optimal investment amount that you've worked out ($1600 per trade). This seems kind of low to me (typically I invest in $5-10k increments), but I won't pretend to have any idea how that stackexchange link works it out. Keeping this in mind, there are a few suggestions:

- Lowering your brokerage cost with a cheaper broker will help you minimise investment costs. The cheapest one that I can find is CMC markets, at $11 per trade
- There is an associated opportunity cost for not being invested in the market (ie, you miss out on the gains), but you can save the money in a high interest savings account until you have your magic investment amount. I currently do this with an ING savings maximiser account, which offers a 4% p.a interest rate.
- There are generally high buy/sell spreads for ETFs with low volumes (the difference between the price you can buy a stock for and the price you can sell an stock for). This is worth factoring in if you choose to investing in ETFs that aren't very popular.

The fees do concern me, but so does being out of the market until I can save the $5,000. It's not a huge sum of money to save but it will take a few months.

On the stackexchange link, what it is meant to do - and I'm placing faith in the guy who did the sums and formulas - is take down your saving rate, saving frequency, interest on the bank account where you're saving, expected interest on investment and also your brokerage cost. It then tells you the optimal number of weeks to wait before investing your money to ensure your brokerage cost doesn't outweigh the opportunity cost of being out of the market.

I've uploaded an example of the spreadsheet which shows that if I save $700 per fortnight, I should allow 5 fortnights to pass and invest during the 6th period of saving. Any less and the brokerage fee is too high, any more and you're missing out on increased returns of the market.

[Johnners]

Thanks for starting the thread Quidgy!

I'm currently reviewing my investment strategy so the timing is great. I took a similar approach to what you have outlined. I saved up the $5000 and opened up the Vanguard Growth Fund last year. It got me started at level I was comfortable with at time, and it's super convenient! Now after doing my research I have come to same conclusions as qwerty, @ qwerty great points made. Is does mean you have to be more disciplined though, and have a clear plan before you start. A bit more effort than the fund, but worth it in the long run.

[misterhorsey]

Hey Quidgy, I"m the OP of the thread that Murdoch has linked to and I still haven't made up my mind!

Qwerty's got some great advice in this thread. And others have also come up with some insights in the thread I started.

It does come down to balancing trying to minimise your fees as much as you can, but also trying to get into the market as soon as you can.

I had originally opened up a retail Vanguard Lifestrategy fund and it was extremely easy to put small amounts in there, but then my concern over the fees meant that I stopped contributing and while I stopped the ASX kicked up by about 12% and I lost (in the short term) the gains that would have been bigger than what I would have lost by paying an extra 0.04% in fees!!!!  The difference between the Lifestrategy fund and an ETF, approximately.

Being out of the market for months until you can save up $5k to invest seems a long time, if you know that you want to invest.  I've stayed out of the market for ages, but mainly because I didn't know what I wanted to do with my cash.

But then again, as Qwerty points out, that extra 0.04% in fees can make a huge difference over 30 years.

Your experience and circumstances will differ from mine, but just something to think about.

Now I think I need to go back to my thread and respond to all the advice, comments!

[qwerty8675309]

The fees do concern me, but so does being out of the market until I can save the $5,000. It's not a huge sum of money to save but it will take a few months.

On the stackexchange link, what it is meant to do - and I'm placing faith in the guy who did the sums and formulas - is take down your saving rate, saving frequency, interest on the bank account where you're saving, expected interest on investment and also your brokerage cost. It then tells you the optimal number of weeks to wait before investing your money to ensure your brokerage cost doesn't outweigh the opportunity cost of being out of the market.

Thanks for the spreadsheet Quidgy. It's definitely interesting putting my numbers in there. It suggests that I should invest every time I get paid by work! I might have to see if I can break down how the formula first to see what kind of assumptions it makes.

[quidgy]

The fees do concern me, but so does being out of the market until I can save the $5,000. It's not a huge sum of money to save but it will take a few months.

On the stackexchange link, what it is meant to do - and I'm placing faith in the guy who did the sums and formulas - is take down your saving rate, saving frequency, interest on the bank account where you're saving, expected interest on investment and also your brokerage cost. It then tells you the optimal number of weeks to wait before investing your money to ensure your brokerage cost doesn't outweigh the opportunity cost of being out of the market.

Thanks for the spreadsheet Quidgy. It's definitely interesting putting my numbers in there. It suggests that I should invest every time I get paid by work! I might have to see if I can break down how the formula first to see what kind of assumptions it makes.

No problem. Look at the link in the spreadsheet, that might explain it better than the spreadsheet itself. The maths is beyond me though.

EDIT: Link to the original thread on Whirlpool where someone much smarter than me (codebeard) explains the spreadsheet and formula: http://forums.whirlpool.net.au/forum-replies.cfm?t=2252279#r13

[frugaljo]

wow when you look at the fees that way, it's craazy not to go with ETF!  thanks for the demo qwerty8675309

Hi Quidgy, welcome to the forums!

First of all, don't underestimate the effect of fees on your investments. I was in the same boat as you 10 years ago - I had read a ton of forum postings about where to invest my money. At the time, my choices were to invest in the only ETF listed on the ASX (ticker: STW) with 0.286% p.a fees. It tracks the ASX200 index. My other option was to put my money into a Vanguard LifeStrategy High Growth Fund with 0.90% p.a in fees. After sleeping on it for a few days, I decided to go with the Vanguard High Growth Fund because it was more diversified (it had international exposure in addition to the exposure to the ASX300)... but then after a few years of investment experience, I decided to read a few good books by the Vanguard founder, Jack Bogle (this is sort of ironic). He posits that there are two major drivers for investment performance - Asset allocation and fees. He illustrated how even a small difference like 0.5% in fees could have a massive impact on the fees you pay during your investment lifetime. To illustrate, take an example of $10k invested in a low cost ETF compared to the Vanguard LifeStrategy High Growth Fund using a calculator provided by MoneySmart:

https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/managed-funds-fee-calculator

Investment Amount: $50000
Investment Earnings: 8% p.a
Low Cost ETFs offered by Vangard (eg, VAS, VTS, VEU) fees p.a: 0.15%
Vanguard LifeStrategy High Growth Fund fees p.a: 0.9%
Investment Time Horizon: 30 years

Over an investment time horizon of 30 years, you've paid $118,426 in fees for the Vanguard LifeStrategy High Growth Fund, with an ending balance of $380,706. If you had invested in one or more low cost Vanguard ETFs, you would have paid about $22,002 in fees, with an ending balance of $481,131. Such is the grand power of low fees and the insidious effect of high fees over long investment horizons!

The other thing I would mention is the the optimal investment amount that you've worked out ($1600 per trade). This seems kind of low to me (typically I invest in $5-10k increments), but I won't pretend to have any idea how that stackexchange link works it out. Keeping this in mind, there are a few suggestions:

- Lowering your brokerage cost with a cheaper broker will help you minimise investment costs. The cheapest one that I can find is CMC markets, at $11 per trade
- There is an associated opportunity cost for not being invested in the market (ie, you miss out on the gains), but you can save the money in a high interest savings account until you have your magic investment amount. I currently do this with an ING savings maximiser account, which offers a 4% p.a interest rate.
- There are generally high buy/sell spreads for ETFs with low volumes (the difference between the price you can buy a stock for and the price you can sell an stock for). This is worth factoring in if you choose to investing in ETFs that aren't very popular.

[humblefi]

Try this link and the links within. http://humblefi.com/2015/01/24/mutual-funds-vs-etfs-some-links/

Hope that helps.

[qwerty8675309]

I think Australian readers need to be careful of the advice offered on the web, which might be aimed at a US audience, particularly when there isn't a full understanding of the rationale behind the decisions. In the US, the more competitive index mutual funds offer very compelling reasons to use these over an equivalent ETF. I'm a bit of a Vanguard advocate, so I'll use them as an example to illustrate some differences.

In the US, Vanguard offers two different approaches when investing in their funds. The first approach is to use a mutual fund. Let's take the popular Vanguard Total Stock Market Index. Here are some key statistics if you invested via a mutual funds:

Fees p.a: 0.05%
Brokerage: N/A (not traded on exchanges)
Buy / Sell Fees: None
Link: https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT

Now lets compare this to the equivalent Vanguard ETF which has a holding in the exact same fund:

Fees p.a: 0.05%
Brokerage: $10 (estimated)
Buy / Sell Spread: 0.1% (estimated)
Link: https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT

You can see in the US, the fees for both the ETF and mutual fund are the same. The difference is in the brokerage and buy/sell spread, which makes the mutual fund more attractive. The mutual fund will also allow you to invest smaller increments, because there is no brokerage, reducing the opportunity cost in waiting to invest.

As I've mentioned in earlier posts, this is not true for Vanguard mutual funds and ETFs in Australia. The mutual funds have much higher fees when compared to their ETF equivalents - this adds up very quickly over time. Given there are differences, it's prudent to do your own investigation, and to come to your own conclusions.

[Murdoch]

Qwerty is on the money with his information.
ETF's are the cheaper option due to cheaper ER by a much bigger difference in Aus than in the US.

I will add another point difference between ETF's and the Lifestrategy option.

Most investment advice aimed at long term passive index investors recommends sticking to a reasonably fixed asset allocation. This can include international, local, REIT, commodities etc... Asset allocation is personal and needs to be tailored to risk tolerance, stage of life, time to retirement etc... Advice to write an Investement Policy Statement to keep yourself honest and avoid market timing can be useful. Something like "Invest 50% of my take home pay into broadly diversified low cost index funds with a 70/30 shares/bank deposit mix, with a 50/50 local/international mix in the shares component".

This can be reflected upon in times of angst or market turmoil to help you through when things look bleak. It can also help reign in market surges so that you also buy the cheaper less performing option. Often the IPS will carry a small statement to this effect regarding rebalancing such as "I will rebalance to my predefined allocation when it is off kilter by >5%"

If local shares surged to 60% of your shares portfolio, you would sell down to 50% again and put the proceeds into the international portion to rebalance you allocations. This predefined action helps you buy international with 'market high' local stocks, and vice versa when things swing the other way. Of course rather than sell shares you could always just top up your international market exposure with spare money to balance it out. This is easy when you are starting out, but becomes harder when the sums grow high.

Some advocate rebalancing at predefined trigger points, or perhaps once or twice a year. But they all advocate having an asset allocation plan and sticking to it for the long run. How strictly is a matter for debate, and I am no expert.

This rebalancing cost money in spreads, broker fees, and CGT depending on timing. Each rebalance costs money. Frequency of rebalancing will depend on your predefined plan and market changes.

This rebalancing is performed within a Lifestrategy fund, and is arguably most of the reason for the higher fees. Having such huge volumes of money in these collective funds, does allow Vanguard to perform this rebalancing cheaply and tax effectively. It also takes the investors emotion out of the equation, which is potentially the biggest achilles heel for most investors.

In the US I believe their plan was to reduce investor fees as more money was invested into their funds, as the economy of scale made this rebalancing even more efficient, and from what I have read they staid true to this plan and fees since starting Vanguard have become cheaper and cheaper. Kudos. In Australia though, I recall Wholesale funds used to be 0.35%pa ER, and were increased to 0.36%pa last year. Though I may be wrong. We are probably in the early days of where Vanguard may go in Australia, and if we follow the US then we can expect more investment capital in index funds and hopefully lower fees, but this may simply be dreaming.

Food for thought.
I don't disagree that ETF's are cheaper in theory, but investment theory easily comes undone when practiced.
For the willing and disciplined investor with a good understanding of the system, tax, trades, and mathematics, ETF's make the most sense.
If you don't meet that description, then the life strategy option may make the most sense.

Murdoch

[savaroo]

Apologies for reviving an old thread, but I believe it's right to continue the discussion here.
Agree with Qwerty's post, he's spot on on the fees of US vs AUS.
however, Vanguard Australia, also offers a mutual fund, both a retail (expensive) and a wholesale.
I saw no mention of the wholesale fund.
You do need 500k to enter, however Vanguard usually allows it for 100k.
the fees on the wholesale fund, are not too bad.
International shares for 0.15% or a fully balanced self made portfolio according by risk tolerance at around 0.36%
this is what i chose for the time being, because I deposit in the thousands on a monthly basis, and have a low tolerance for overly complicated tax returns.
I'm not saying that what i chose is right, in fact, what do you guys think?

[steveo]

Savaroo - I think if I had enough money to go the wholesale fund route I would do that. I'm investing outside of Super now and I choose the ETF's. In stating that I might recommend the normal fund if you were investing smallish amounts in an irregular fashion. I have two young kids I think they would do great saving $5k and then investing into the normal mutual fund.

I don't feel any of these options are bad.

[misterhorsey]

So this is an old thread, but I've only just read Murdoch's summation of the advantages of a fund v ETFs and it's brilliant. Concise and illuminating.

I'm disciplined enough to do regular exercise and read regularly.  But I'd be hopeless at rebalancing the asset allocation of an investment portfolio.  Too much over optimising and indecision.  Paying the higher fees of a fund is, I think, a necessary evil for me at least. It should result in higher returns and more time savings than procrastinating over rebalancing that I will never do.