Investing in index funds

[superfraser]

Hi guys,

I plan to invest in some index funds in the very near future.

I have taken the time to understand the concept of index funds, but haven't yet researched which would be the right fund(s) for me.

I'm looking for a conservative way to invest, with a long term strategy, investing more and more of income over time.

At the moment, I'm interested in Argo and Afic (as the barefoot investor suggests - and I like that he's conservative), and I'm interested in Vangaurd, as I've spent a small amount of time in their Melbourne office and spoken to some of their employees, and I can appreciate the type of company they are.

As I begin further research, can anyone make any suggestions or comments to aid me.

Much appreciated.

 

[androidtommy]

I became interested in investing mid last year and jumped into three of Vanguards funds. I'm still pretty young so I went for the higher growth funds (life strategy high growth, australian high yield and international not hedged), but thought this was still more conservative than individual stocks.

I am right behind Vanguard and what they offer. The $5000 initial investment might be a bit of a put off, but from there you can invest as little as $100 through BPAY, which is really convenient for me. Once you are in one fund, you have specific BPAY numbers that mean you can invest into another fund with $5000, so you dont have to fill out all the paperwork again.

I have been with AFIC for a few years (my dad purchased them for me) and they are fine, but I would definitely choose between Argo and AFIC, not both. Have a look at their website and find a list of their holdings to compare which you like more (I think they actually hold shares in each other too).

You should have a look at ETFs too. They are very similar and you can diversify internationally etc, but some are not going to be as good as Vanguard's funds simply because you have to pay brokerage to buy more, not worth investing $100 at a time like it is with Vanguard.

 

[superfraser]

I became interested in investing mid last year and jumped into three of Vanguards funds. I'm still pretty young so I went for the higher growth funds (life strategy high growth, australian high yield and international not hedged), but thought this was still more conservative than individual stocks.

I am right behind Vanguard and what they offer. The $5000 initial investment might be a bit of a put off, but from there you can invest as little as $100 through BPAY, which is really convenient for me. Once you are in one fund, you have specific BPAY numbers that mean you can invest into another fund with $5000, so you dont have to fill out all the paperwork again.

I have been with AFIC for a few years (my dad purchased them for me) and they are fine, but I would definitely choose between Argo and AFIC, not both. Have a look at their website and find a list of their holdings to compare which you like more (I think they actually hold shares in each other too).

You should have a look at ETFs too. They are very similar and you can diversify internationally etc, but some are not going to be as good as Vanguard's funds simply because you have to pay brokerage to buy more, not worth investing $100 at a time like it is with Vanguard.

Outstanding! I plan to invest > $15K so the $5000 initial fee is no problem.

Vangaurd sounds outstanding. I'd love to hear any more thoughts you have and anymore you can tell me about ETFs as well.

I expect I'd start with > $15K almost immediately, and in July or August, I'd probably invest an extra $30K. And then continue to make smaller investments for the foreseeable future.

 

[darren forssman]

I invested in the Vanguard Aussie High Yield and Hedged International Shares a year before the GFC, reinvesting my distributions for around 5 years before stopping that.

Whilst the rest of the managed funds of other funds broke even nearly 2 years ago, I have only recently broken even on my initial investment.

Contrast that with my margin loan investments which have gone gangbusters.

Do not know anything about ETF's myself but Vanguard's website should provide something useful:

https://www.vanguardinvestments.com.au/retail/ret/investments/etfs.jsp#etfstab

 

[androidtommy]

Outstanding! I plan to invest > $15K so the $5000 initial fee is no problem.

Vangaurd sounds outstanding. I'd love to hear any more thoughts you have and anymore you can tell me about ETFs as well.

I expect I'd start with > $15K almost immediately, and in July or August, I'd probably invest an extra $30K. And then continue to make smaller investments for the foreseeable future.

Not sure what else to say about them. I like their services and find them easy to use with a good range of funds available. It's not great to hear the above poster taking 5 years to make his his initial investment, but I guess a 50% loss needs 100% gain to get even and now its there things should be okay.

As for ETFs, i have bought a few(iShares Global Consumer Staples IXI, Vanguard Emerging markets VGE and SPDR Global Dividend WDIV). I havent held them for too long yet, but it's good how you can get different kinds of funds or be in different markets (pretty much any in asia, global funds, different sectors here and globally, and different strategic funds).
They have fees around 0.1 to 1.0% (i think, I assume they take whatever fees out of any dividends i might get??)
The main problem with them is that its not wise to invest regulary as the brokerage fees will take a lot of the profits, unless you are putting in large lump sums.

Otherwise, check out what their holdings are and compare them to other funds/shares you have. For diversities sake you should minimise the overlap, no point owning Vanguard high yield fund, iShares S&P/ASX 20 ETF and SPDR S&P/ASX 50 ETF as they have a lot of overlap.

http://www.asx.com.au/products/etf/managed-funds-etp-product-list.htm

The ASX kindly puts a lot of these things in one place for easy viewing, like a list of the LICs (like Argo and AFIC), A-REITs, ETFs/ETPs and other stuff.

 

[darren forssman]

It's not great to hear the above poster taking 5 years to make his his initial investment, but I guess a 50% loss needs 100% gain to get even and now its there things should be okay.

it was probably more to do with the gfc, think the hedged int'l fund dropped from $0.95 to $0.50 and the high yield fund from $1.40 to $0.90.

i guess being indexed the returns when the market gained ground wasnt as high as non-indexed funds.

 

[J_Moore]

it was probably more to do with the gfc, think the hedged int'l fund dropped from $0.95 to $0.50 and the high yield fund from $1.40 to $0.90.

i guess being indexed the returns when the market gained ground wasnt as high as non-indexed funds.

The ASX index is still below pre-GFC levels. International indexes have cleared it comfortably, but having it hedged would have played some havoc with it.

 

[Patrick Bullet]

Hi All,
I have some questions about index funds like STW and SPY and was wondering if others had some answers. Is it true that you can just purchase units of these funds using NABtrade (or similar)? In other words, log into NABtrade, search for STW and put in a buy order, just like I'd do if I wanted to buy some shares? Or do I have that wrong? Similarly - do you sell them in the same way?

Also, there seems to be a commission/management fee (0.19% for STW). How exactly would they get that money from me? E.g., Do they inflate the buy price by the amount that would be commission and just take the commission out when I buy, do they send me an invoice, or do they take their commission from my dividends as those are paid out? Or is there another method I've not thought of? Is the fee annual and based on the value of my index fund holdings? How do they choose the date that they value the fund for calculating the management fee?

On the dividend front, do they just pay these out six-monthly (or other regular period) or are they paid as the companies in the relevant index pay their dividends out?

Thanks in advance!

 

[Jimmy_the_Gent]

Hi All,
I have some questions about index funds like STW and SPY and was wondering if others had some answers. Is it true that you can just purchase units of these funds using NABtrade (or similar)? In other words, log into NABtrade, search for STW and put in a buy order, just like I'd do if I wanted to buy some shares? Or do I have that wrong? Similarly - do you sell them in the same way?

Yes. Buy and sell in the same way as normal stocks.

Also, there seems to be a commission/management fee (0.19% for STW). How exactly would they get that money from me? E.g., Do they inflate the buy price by the amount that would be commission and just take the commission out when I buy, do they send me an invoice, or do they take their commission from my dividends as those are paid out? Or is there another method I've not thought of?

I don't know the answer to this but I can rule a few of your options out:

- They don't inflate the buy price by the commission amount. Otherwise how would they get the annual fee from people who hold for more than 1 year?
- Invoice? No. I can tell you that from experience... And they'd end up chasing people who don't pay. That would be a huge pain for them and a bit silly since they already hold your money.
- From your dividends? Seems like a good way to go but I don't know for sure
- Some other method? Perhaps when they re-balance the portfolio. I don't know how often they're shuffling things around.

Is the fee annual and based on the value of my index fund holdings?

Yes, but more so on the value of the index fund as a whole, of which you'll own a proportion.

Effectively your annual returns will lag the index return by roughly the management fee. There will be a some variance to that though based on whether the ETF trades at, below or above it's net asset value and what interest they may get on any cash. There would be other factors too but none of them would cause a major divergence.

How do they choose the date that they value the fund for calculating the management fee?

No idea.

On the dividend front, do they just pay these out six-monthly (or other regular period) or are they paid as the companies in the relevant index pay their dividends out?

Thanks in advance!

Nah, the ETF's would hold the money the companies pay and then pay it on to you either half yearly or quarterly.

STW does it quarterly.

For what it's worth, STW does the ASX200 and charges 0.19% p.a. Off the top of my head, Vanguards VAS charges 0.14% p.a. and is based on the ASX300, so it's a little bit cheaper and a little bit more diversified.

 

[Patrick Bullet]

Thanks; this is really helpful!

Thanks also for the VAS tip. I remember reading somewhere that, in the Australian market, you have to be a little wary of index funds because, although they appear diverse on the surface, they are in fact quite heavily represented by financial stocks. I imagine that VAS would be more relilient than STW to shocks to the financial sector.

 

[Jimmy_the_Gent]

Thanks; this is really helpful!

Thanks also for the VAS tip. I remember reading somewhere that, in the Australian market, you have to be a little wary of index funds because, although they appear diverse on the surface, they are in fact quite heavily represented by financial stocks. I imagine that VAS would be more relilient than STW to shocks to the financial sector.

On the contrary - by holding more companies, VAS would be less exposed to movements in the big 4 banks/financials, although the difference is probbaly negligible.

You're right about the Australian market though - about 33% of it is financials, so you're not really getting as much diversification as you might think.

If that bothers you, you could look at international ETFs.

 

[Patrick Bullet]

Thanks again; you are indeed a gentleman!