Hi,
Some background for starters:
- Australian
- currently overweight in property, and want to add shares to balance that out. Do have mortgage, but low gearing considering cash sitting in mortgage offset account
- looking to invest in ASX200 or similar Aussie Index (broader OK, preferably not narrower)
So my challenge is to find the overall lowest cost means of buying exposure to the share index. This is for long term investing, not short term trading. Potential solutions include:
1. Take money from the mortgage offset account and buy either shares or an ETF direct. Cost of money to do this is my mortgage rate, at around 4.3%, plus share transaction and/or ETF management fees. This approach is more limited than I would like in terms of keeping/maintaining a healthy cash backup for potential emergencies.
2. Buy shares and/or ETF via a share margin loan. Cost of money about 6.5% at Commsec. Probably cheaper options out there, but always going to be an expensive route to achieve desired exposure.
3. Buy leveraged ETF. No idea on the cost of money the ETF pays (anyone know?). Not recommended long term due to constant re-balancing to maintain exact leverage ratio, which is an artificial constraint of these systems that personally I have no need to maintain.
4. Buy index CFD's via brokers such as Pepperstone or Oanda. Cost of money to do this is their overnight swap rates - they typically charge 2.5% over actual rates - which means a cost of about 4.5% pa currently. They pay out amounts equivalent to the dividends, but you loose the franking credit. Very high leverage useful as leaves almost all cash available in offset account as safety buffer for general life (and investment performance...).
5. Buy LEPO (options) in the ASX200 (XJO). Cost of money should theoretically be close to Bank Bill Swap Rates, currently just below 2%. Roll-over costs (slippage, commissions etc) several times a year. I haven't looked into it, but doubt franking credits associated with dividends are considered when calculating value of options.
6. Sell in the money puts (XJO). Cost of money should theoretically be close to Bank Bill Swap Rates, currently just below 2%. Roll-over costs (slippage, commissions etc) several times a year. Added benefit in that you receive cash/premium for taking on volatility/risk, but you loose/miss out on further gains should the index rise beyond strike price.
7. Buy SPI200 futures contracts. Cost of money should theoretically be close to Bank Bill Swap Rates, currently just below 2%. Roll-over costs (slippage, commissions etc) several times a year. I haven't checked, but doubt franking credits associated with dividends are considered when calculating value of futures contract. With the proliferation of CFD, seems less brokers actually do this nowadays.
Are there any major alternatives that I have not mentioned above? Does anyone have any comments or more detailed information on which is the lowest costs?
I suspect my most cost efficient way of doing this is actually number 7, buying SPI200 futures. Seems that CFD's are easy, but they are further removed from the core underlyings and you are paying for that convenience and packaging.
Before people raise it, I am very aware of the risks of leverage, and I do ensure my total portfolio/asset leverage rates are at acceptable levels, and that cash can be moved around to ensure drawdowns in particular assets/instruments can be covered.
I have been doing number 6 (selling in the money puts) for some time, which has worked out well, but of the above possibilities is least likely to replicate the index and is at high risk of missing big moves up. I do have some index exposure through CFD's (option 4), which the brokerage industry has now set-up in such a way as to make it very easy and cheap commission wise, but long term the overnight swap/funding rates will eat into performance.
Appreciate any suggestions on the lowest cost way for me to gain that ASX200 exposure.