Investing in Exchange Traded Funds
Exchange-Traded Funds (ETF’s) are a popular choice for investors seeking to add a revenue stream and maximise their returns through passive investment.
Exchange-Traded Funds have become more prominent in recent years. The main reason is they are an effective option for those wanting to diversify their share portfolio. For instance, ETFs give the option to invest in particular industries or track the market index all at a low cost. Furthermore, it is easier than acquiring each individual share in the companies that form part of the ETF. I have summarised some popular choices for those wanting exposure to ETF’s through either the ASX or the NASDAQ index.
1. Vanguard Australian Shares Index (VAS)
The Vanguard Australian Shares Index ETF (VAS) aims to track the performance of the Standard and Poor’s (S&P) /ASX 300 index. Firstly, this index provides exposure to 200 of the largest Australian companies. After that, the 100 smaller cap companies are included that have greater than $100 million (AUD) in market capitalisation. Secondly, the Vanguard fund currently has $6.89 Billion dollars (AUD) in funder under management. Thirdly, the gross performance returns since inception in 2009 are 9.13% per annum (as of November 2020) with a distribution rate of 4.45%. Finally, one of the selling points of this ETF (particularly Vanguard’s ETF’s) is the low management fee.
I have summarised some of the features of this ETF that make it appealing to investors seeking long-term growth:
Pro’s
- Low 0.1% management fee per annum
- Dividend income and franking credit growth
- Diversification across Australian Shares
- Low cost to begin investing
Con’s
- Limited growth stocks exposure
- Lacks international markets exposure
- Brokerage fee is not a flat fee (percentage of portfolio)
2. Vanguard Diversified High Growth Index (VDHG)
Where the VAS ETF is lacking in exposure to growth shares VDHG provides a great alternative for investors seeking international shares exposure. The potential to generate higher returns in another market may seem like the obvious choice. However, investors must also have a greater tolerance for risk in their investment. Moreover, the VDHG total annual performance return since inception (2017) is 8.65% per annum. This was recorded as of November 2020 with a distribution rate of 4.26%.
The ETF is split between 90% growth stocks and only 10% income stocks highlighting the difference in investment to the VAS ETF. This greater risk exposure leans towards a higher return but there is no guarantee. For instance, the investment could experience greater market volatility due to the underlying securities that make up the VDHG ETF.
I have provided a summary of the pro’s and cons for investing in this ETF:
Pro’s
- Low ongoing fees 0.27% management fee per annum
- Dividend income and franking credit growth
- Diversified portfolio of Australian and international growth shares
- Low cost to begin investing
- No currency conversion fees
Con’s
- Greater market short term volatility with exposure to growth shares
- Lower yield and lacks security of income shares
- Brokerage fee is not a flat fee (percentage of portfolio)
The split of the VDHG portfolio is approximately 40% Australian index and 60% international index. This provides a greater exposure to international markets seeking long-term capital growth.
3. BetaShares NASDAQ 100 (NDQ)
If you would like to invest in the US share market then an ASX listed ETF that tracks the performance of top US companies may be for you. BetaShares NASDAQ 100 ETF is comprised of the 100 largest companies traded on the NASDAQ based upon market capitalisation. Some of these companies include Apple, Amazon, Facebook, Netflix, and Tesla to name a few. One of the main drivers for this type of investment is the portfolio diversification it provides to investors. In other words, it reduces the need for investors to speculatively buying multiple shares to achieve the same result.
NDQ has delivered an impressive 21.4% per annum in fund returns (after fees) since inception in 2015. This is primarily due to the influence of the large tech companies performing well within the US market. In addition, The ETF also offers a distribution yield of 2.5% per annum. In saying this, past performance is not always a predictor of future returns.
Some of the additional benefits are summarised below:
Pro’s
- Management Fee 0.48% per annum
- Diversified international portfolio
- Higher earning exposure through global share market
- Simple and cost-effective
Con’s
- Higher management fee that some other ETF’s
- Subject to higher volatility investing in US growth shares
- Less control in underlying stocks
Exchange Traded Funds domiciled in Australia
This ETF is domiciled in Australia as opposed to being held in the US. Therefore investors who are Australian residents for tax purposes would be subject to Australian taxes and regulations. The main advantage is that it simplifies your tax affairs in comparison to investing directly in the US share market. For instance, you would not be required to complete a W-8BEN form. Similarly, this form would otherwise be needed if you were wanting to claim back the 15% US withholding tax. These taxes are imposed on the dividend distributions received from the US shares.
Summary of Exchange Traded Funds
In conclusion, investing in Exchange Traded Funds like any asset class requires research and understanding of the investment. To gain a better understanding of Australian ETFs there is The Australian ETF Guide. I have also written an article comparing the Best Online Brokers in the Share Market. The information contained in this post is general in nature and not financial advice. Please ensure that you do your own research and due diligence. Above all, consider your personal circumstances when choosing the right investment for your future.
