Australian ETF Comparison: FAIR vs IOZ

There is a variety of options for investors looking to gain exposure to the Australian stock market. Two of those options is the iShares Core S&P/ASX 200 ETF (ASX: IOZ) and BetaShares Australian Sustainability Leaders ETF (ASX: FAIR).

Investment Strategy

IOZ is a vanilla ETF product with a relatively straightforward investment strategy. The ETF consists of the 200 largest companies listed on the Australian Stock Exchange measured by market capitalisation.
FAIR is a little more complex, tracking the performance of an index that excludes Australian companies with direct or significant exposure to unethical industries or operations.
FAIR Investment process. Source: BetaShares Fair Flyer

The ETF initially excludes companies with operations in fossil fuels, gambling, tobacco, weapons, animal cruelty, alcohol and boards with zero gender diversity.

From the remaining companies available, “sustainability leadersare identified. To be classed as a sustainability leader, a company must either:

  • derive more than 20% of revenue generated from a range of industries including renewable energy, water efficiency, recycling, waste remediation, transport, education, healthcare, social services and social infrastructure or,
  • recipient of either an “A” or “B” grade rating from a trusted ethical consumer report (Ethical Consumer Guide, Baptist World Aid Behind Barcode) or,
  • certified B Corporation (B Corp)

To ensure diversification, each sector is capped at 10 companies. Sustainability leaders are given preference before companies from the broader universe.

Performance and benefits

The below graph compares the performance since March 2017 of FAIR and IOZ. FAIR has outperformed IOZ, in addition to falling relatively less when the market slid on news of COVID-19 in March last year.

FAIR vs IOZ Price Chart. Source: Yahoo Finance
IOZ has a longer product history than FAIR. Over the past ten years, IOZ has returned 8.55% per annum.
IOZ pay distributions to holders every three months and has a trailing yield of 2.01%. FAIR distributes only every six months but has a higher yield of 2.5%.
Financials (30.5%), Materials (20.1%), Health Care (9.9%) are the three major sector weightings within IOZ. Conversely, FAIR major sector weightings are Health Care (25.4%), Real Estate (19.0%) and Financials (17.0%)

Fees and risks

FAIR charges an annual management fee of 0.49% compared to an annual management fee of 0.09% for IOZ.

This may not seem much of a difference in the short run, however the 40 basis point difference in fees each year adds up over time.

Below is a chart illustrating if you were to invest $10,000 into both FAIR and IOZ today, what the closing balance would be in 2051. For simplicity, each ETF is assumed to return 8% per annum for 30 years.

FAIR vs IOZ Fee Comparison. Assumed a return of 8% per year for 30 years.

In 2051, the IOZ closing balance would be $98,141 and the FAIR closing balance is $87,794. That’s a difference of $10,347!

Both ETFs focus on Australia (2% share of global markets), therefore, underrepresenting the remainder of the worlds. To gain exposure to the other 98% of world markets, investors will require ETFs, which have a more broad geographic mandate.

My take

Personally, I prefer IOZ primarily for its lower management fee. For a broad ethical Australian ETF, I prefer Vanguard Ethically Conscious Australian Shares ETF (ASX: VETH).

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Low fees? Check.

Long-term growth potential? Check.

Regular cash returns? Check!

This ETF makes investing in ETFs "Super-Easy".

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At the time of publishing, Lachlan does not have a financial or commercial interest in any of the ETFs mentioned.

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The information on this website is general financial advice only. That means, the advice does not take into account your objectives, financial situation or needs. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. Please read our Terms & Conditions and Financial Services Guide before using this website.

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