Index fund comparisons

This article focuses on Australian share index funds; the table, details some of the main unlisted ones (not bought and sold on the Australian Stock Exchange like shares) and where they're available.

There are several avenues for investing in index funds:

Fund managers

Index funds from companies such as BankWest and Vanguard Investments are available direct to consumers. Go to our fund comparison table or more.

Wraps and master trusts

Most include index funds on their investment menus. However, this can be an expensive way to invest in the index, depending on what fees you negotiate. You probably wouldn't open a new master trust or wrap account just to access index funds; several are available outside these platforms, often at lower costs. Index investing through a master trust could mean you pay higher management fees and adviser commissions than if you invested in an index fund available direct to retail investors. Go to our fund comparison table and see our report on wraps / master trusts for more.

Super funds

Many corporate super funds and master trusts (see above), as well as some industry funds, offer index funds on their investment menus. Check our table for the largest 20 super fundsoffering index options. We also compare new low-cost entrants like max Super and Virgin Superannuation which use indexing as their core approach.

Advisers, financial planners and discount brokers (but don't forget to check out their fees and commissions).

Stockbrokers

Exchange traded funds, a type of index fund that can be bought and sold like shares, are available through stockbrokers.

We asked research house Morningstar to provide data for Australian share index funds on its database, which we used to compile the table below.

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.

Exchange traded funds (ETFs) are index funds listed on the Australian Stock Exchange.

• ETFs can be bought and sold like shares.
• ETF fees are much lower fees than the unlisted index funds we've described so far.
• There's just one provider of retail Australian share index ETFs in Australia - State Street Global Advisors (SSgA). It offers the streetTRACKS S&P/ASX 50 and S&P/ASX 200 funds.

ETF good points

• Lower fees. No entry or exit fees and extremely low MERs - at just under 0.29% streetTRACKS costs less than half of what the next cheapest index funds cost, and as little as one tenth of what you could pay with some actively managed share funds.
  
• Liquidity. You can get in and out quickly (like shares and other listed securities).
  
• Price transparency. The ASX regularly quotes up-to-date ETF prices, telling you the exact price you can buy and sell at. With unlisted funds, investors don't know the exact buy/sell price when they put in an application or redemption notice (they'll probably get the day's closing price).
  
• Other advantages are similar to those of unlisted index funds - for example index managers buy and sell shares less frequently than active managers so their transaction costs and capital gains/taxes should be lower.

ETF bad points

• No choice. There’s only one provider of retail Australian share index ETFs.
  
• Stockbroker fees. They’re effectively like entry/exit costs.
  
• Not suitable for investors with relatively small starting amounts and who want to set up a regular savings plan (for example, making monthly contributions). Stockbroker fees would apply to each additional investment. While the annual management fees are higher with an unlisted index fund like BankWest’s Top 200, it might be more suitable for investors seeking a regular savings plan or with relatively small amounts to invest.
  
• TRAP: inappropriate use. Some investors might buy and sell ETFs regularly — the opposite of what index funds are intended for. Trying to time the market is difficult; and buying and selling the index incurs transaction (stockbroker) costs.

There's just one provider of retail Australian share index exchange traded funds (ETFs), streetTRACKS, which offers S&P/ASX 50 and 200 funds*. The latter invests in securities comprising the 200 index in proportion to their relative weightings. The fund may also hold short-term derivative contracts (futures), which the company says is to lower the risk that the fund outperforms or underperforms the benchmark index, and to achieve its investment aims.

The table, below, compares the ETF's after-fee returns with its benchmark index. Comparing this table with the funds in our fund comparison table shows that the comparatively low management fee allows ETF investors to track the index more closely than with more expensive unlisted index funds. These performance figures don't take account of stockbroker fees investors would pay. See our fee comparison table for more.

Many corporate super funds and master trusts, as well as some industry funds, offer index funds on their investment menus. The table below shows the largest 20 super funds which offer an index investment choice. For more information check out our Choice guide to DIY super.

Table: Largest 20 superannuation funds offering an index investment choice

Fund Name	Market Segment
MLC MasterKey Superannuation	Personal master trust
Mercer Super Trust (Corporate Super Division)	Corporate master trust
Sunsuper	Industry fund
Colonial First State — FirstChoice Personal Super	Personal master trust
Plum Superannuation Fund Employer Division	Corporate master trust
BT SuperWrap Personal Super Plan (BT Badged)	Personal master trust
ASGARD Superannuation Account	Personal master trust
MLC MasterKey Business Super	Corporate master trust
HOST-PLUS	Industry fund
Navigator Personal Retirement Plan — Superannuation Service	Personal master trust
Macquarie Super Manager	Personal master trust
Integra Retirement Plan — Superannuation	Personal master trust
SUMMIT Master Trust Personal Super Plan	Personal master trust
ING Corporate Super	Corporate master trust
MasterKey Custom Superannuation Fund	Personal master trust
ANZ Super Advantage — Personal	Personal master trust
ASGARD Employee Superannuation Account	Corporate master trust
PortfolioCare — Super Service	Corporate master trust
Colonial First State — FirstChoice Employer Super	Corporate master trust
Perpetual WealthFocus Super Plan	Personal master trust

Indexing pros and cons

Pros:

• Low fees
  
• Track index returns (before fees) and should beat active fund managers that under-perform the index.
  
• Diversification. Your risk can be spread across hundreds of shares/companies that comprise the index (on the downside you're fully exposed to that market's risk).
  
• Low turnover. Because index funds buy and sell shares less frequently than actively managed funds, transaction costs are lower, cutting fees for investors. This can also mean the fund has lower tax liabilities, as capital gains aren't realised as often as with actively managed funds.
  

Cons:

• Track index returns. If the index loses value, so will your investment. If Australian shares perform poorly in the future, you could lose significant amounts of money.
  
• Specific market risk. In the case of an S&P/ASX index fund, for example, you've no diversification away from Australian shares. You've full exposure to that market.
  
• Underperforms the more successful active managers.
  
• You'll invest in all companies in the index - even those you may not like or don't think will be profitable.
  
• Less flexible in market downturn. Index managers can't shift investors' money into safer havens like cash and government bonds, or use other risk-reduction strategies active managers employ.

Active vs index funds

The debate about whether index (‘passive’) or active fund management is ‘better’ has gone on for many years; it’s unlikely that a consensus will ever be reached.

Active and passive fund management have pros and cons and are both valid management styles.

Studies and reports (often sponsored or promoted by index managers), are sometimes used by index managers to make the case for indexing by presenting data to support their argument that index funds outperform average active funds, for example. Another recent study suggests that even when active managers outperform, they’ve difficulty in maintaining this performance in subsequent years.

However, you’d expect active managers to argue that they add value, and the best actively managed funds perform better than index funds. Over the three years to 12 December 2005, for example, the best performing Australian share funds returned around 40% pa (however, these funds are generally more specialised than standard diversified Australian share funds, using gearing or specialising in resource companies). The sector median was around 19% pa, while the index returned around 22% pa over that time.

The problem for investors is picking an active fund that’ll outperform in the future; past performance is not a reliable indicator. Some in the industry say that getting advice from a professional is crucial in picking the right managed funds; however, the cost of this advice — whether fee or commission-based, should be factored into your calculations and decision.

For more info on selecting a managed fund, check out out Managed funds.

This article last reviewed March 2006

The fees you pay for your investments can have a big impact on your returns. The table below compares the after-fee returns for various index funds, based on $10,000 invested for five years (the minimum recommended by some fund managers), with annual growth (before fees) of 8%.

• Other things being equal, lower fees mean an ETF gives the best return (about $300 better than a competitive index fund, which in turn is around $1000 better than a fund with high entry/management fees).
• The results will differ depending on assumed return, investment timeframe and amount, and other factors, such as brokerage you pay to invest in an ETF (we assumed $30, a reasonably competitive rate from an online broker), or the fees you negotiate with a financial planner.