04.Index and exchange traded funds
Index funds are among the cheapest way to invest in either the whole Australian share market or a portion of the index. These funds take the opposite approach to actively managed funds in which fund managers try to outperform their peers and chosen benchmarks. They attempt to track a safe benchmark: for example, the best-known index manager, Vanguard Investments, offers an Australian share index fund that aims to replicate, before fees, the performance of the S&P/ASX 300 Accumulation Index. Such index funds are “unlisted”, because they’re not quoted on the Australian stock exchange. Like managed funds (opposite), you buy units in an index investment from the fund manager, or through a financial adviser or broker.
The main advantage of index funds is their low fees, usually less than 1% per annum. On the downside, index funds won’t outperform the market they track or their chosen benchmark. Share index funds will invest in both poor- and well-performing companies, and may be less diversified than managed funds that invest in a range of asset classes (cash, bonds, property and shares).
The table shows two of the domestic index funds available to people with relatively small amounts to invest. International index funds covering sectors such as international shares, bonds, property and fixed interest are also available.
(A) BPay = $100; cheque = $1000.
(B) For less than $50,000; fees reduce for larger amounts. na Not applicable.
ANZ launched this fund in November 2008, so performance fi gures are not yet available.
Exchange traded funds
Exchange traded funds (ETFs) are the cheapest way to track the performance of a particular share index. Essentially, unlike the unlisted investments in index funds, ETFs are index funds that are bought and sold like shares. Their main benefit is low fees, which start at just 0.29% for an Australian share fund. These listed funds also allow you to get instant diversification – with one trade you can become a part-owner in hundreds of companies. Like any other share, you’ll need to go through a stockbroker or online broker to buy ETFs, so consider broker costs in your decision.
Despite their low costs and accurate tracking of chosen share market indices, not many financial planners recommend investing in ETFs, perhaps because they’re not authorised to do so, or ETFs don’t pay them sales or advice commissions. Fee-for-service financial planners who aren’t reliant on commissions may be more likely to recommend investing in ETFs.
The ETF market is rapidly growing around the world, and has expanded in Australia recently with the launch of iShares, which tracks the performance of 16 overseas share markets. Closer to home, SPDRs (which originally came from the US title “Standard & Poor’s Depositary Receipts”) from State Streets Global Advisers give you the opportunity to track the local share market’s overall performance (see Useful Websites). The table below profiles Australian share ETFs.