Index fund comparisons

We compare Australian share index funds and profile a low-cost Exchange Traded Fund.
 
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  • Updated:6 Mar 2006
 

01.Introduction

Index-funds

Index funds are the most cost-effective way to get investment returns reflecting (before fees) the returns of particular benchmark indices, such as the Australian shares S&P/ASX 200 index. The main features of index investing are:

  • Lower fees: index funds are generally cheaper than actively managed funds, although you can still pay a lot for some index funds if you invest through a master trust and pay for advice. Fees have a big impact on investment returns.
  • Average performance: index funds won’t outperform the market or more successful active managers — the aim is for average returns in line with the index, before fees.
  • Long-term outlook: share index investing is based on the assumption that over the long-term shares outperform most other asset classes. In the short- to medium-term, share prices go up and down, so index investing is like a marathon, not a sprint.

Please note: this information was current as of March 2006 but is still a useful guide to today's market.


This report compares fees, features and performance of Australian share index funds and profiles Exchange Traded Funds (ETFs), a new low-cost way to track index returns.

Investment performance warning

Past performance is not a guide to future performance. Australian shares have had an outstanding run over the last three years, but whether share values continue to rise in the future is highly uncertain.

Findings

  • Availability: most funds we compared are only available through master trusts; a couple are available direct to investors as 'stand-alone' funds.
  • ETFs have lower fees: the cheapest retail share index fund we could find is an exchange traded fund from State Street Global Advisors (SSgA).
  • Index tracked: most Australian share index funds aim to mirror the performance of the S&P/ASX 200 Australian Shares Index (considered Australia's investment benchmark and including 78% of listed companies, as measured by market capitalisation). Others track the S&P/ASX 300 (79% market capitalisation for Australia).
  • Returns: index funds are likely to mirror their chosen benchmark, before fees, pretty closely (the technical term for their accuracy is the 'tracking error rate'). Differences in funds' returns are due mainly to fees (taxes and transaction costs also play a part).
  • Fees: compare annual and entry fees; there can be huge differences.
    • Annual management fees. Management expense ratios (MERs) generally range from around 0.75% pa to over 1.5% pa. Vanguard's Index Australia Share Fund sold direct to investors has the lowest MER (0.75% pa for the first $50,000, 0.5% pa for the next $50,000 and 0.35% pa for balances over $100,000). Sometimes, index funds' MERs are higher when you invest through a master trust rather than direct. For example, investing in a Vanguard Australian share fund through an ANZ, ING or MLC master trust can nearly double the direct index fund's management costs: 1.44% (ANZ entry fee option), 1.44% (ING entry fee option) and MLC's maximum 1.28%. Fee discounts apply with these platforms.
    • Perhaps the main reason for higher fees through master trusts is that they use financial planners - higher fund management and entry fees are effectively what you pay for their advice.
    • Entry fees. Usually nil, but, TRAP: you could pay up to 5% for index funds offered through master trusts (that means 5% of your initial and subsequent investments could be swallowed up). Only pay an entry fee (which funds often pay to advisers as a commission, and which you can negotiate) if you think the advice is worth it. We don't think you should pay anything like 5% to access an index fund; the whole point of index investing is to keep fund management costs down and avoid adviser commissions and fees!
    • Minimum investment. Of funds available outside master trust structures, BankWest has the lowest minimum entry amount ($2500 if you agree to contribute at least $100 per month as part of a regular savings plan, otherwise $5000). Vanguard's starting amount is $5000; the minimum for additional contributions is $100 (Bpay) or $1000 (payments by cheque).
     
     

     

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