According to the latest report from S&P Dow Jones Indices, the “de facto scorekeeper of the ongoing active versus passive debate” shows that after fees 80% of large-cap equity funds failed to beat the S&P/ASX 200 over the 15 years to 30 June 2018.
To me, this explains why so many investors have increasingly been turning to ETFs and index funds.
What is an ETF?
Index funds are passive investments which track an index, such as the ASX200. Exchange Traded Funds or ETFs are the ‘wrappers’ around the fund to make it easier to invest. An ETF can be bought and sold on a stockmarket such as the ASX.
An example of an ETF listed on the ASX is iShares Core S&P/ASX 200 ETF (ASX: IOZ), which tracks the largest 200 companies on the ASX and charges a management fee of 0.15%.
Obviously, for a DIY investor it would be quite cumbersome and expensive to buy or sell every company in the ASX 200. Just imagine, 200 buy orders to try and replicate the ASX 200 would cost an individual investor at least ~$4,000 in brokerage fees alone ($20 x 200)! Even if you had $1 million to invest, the $4,000 in brokerage fees would represent an expense of 0.4% and even higher on smaller investments.
Pooling money with other investors to achieve economies of scale allows expenses to be significantly cheaper than doing it yourself. Plus, you don’t have the stress or burden yourself with trying to track an index and rebalance… which will incur more brokerage fees!
There are many benefits to EFTs including:
- Low cost
- Instantaneous buying/selling
- Price transparency
- Portfolio diversification
- Able to see underlying holdings
- Tax benefits
In future articles, I will elaborate on some of the benefits of ETFs such as portfolio diversification and tax benefits.