Battle of the index funds: Worldwide fund

Welcome to final round of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in 7 x total world funds.

We will be comparing the cost between the lowest cost fund providers that can be summarised in the tables below.

 Current as at November 2018

Current as at November 2018

The world funds are a stock market index fund and are ideal for investors buying for the long term (10 years plus), that want to invest in a wide range of global companies (1400+) and are able to accept some market volatility. The companies in world funds consist of a wide range of sectors within international markets.

It really is the ultimate fund for diversified stocks and it is possible for this fund to make up a large percentage of your overall stock portfolio. You may want some safer assets such as bonds, or some local stocks for the dividend and tax benefits, or some property or value funds, but well diversified international stocks are the backbone of any stock portfolio and these funds provide just that.

The downside to investing overseas is the increased tax costs which we will get into later. Unfortunately it is a price we pay for full diversification.

Superlife, Smartshares and InvestNow all use Smartshares, which invest directly to the Vanguard total world stock fund. This fund tracks the performance of the FTSE global all cap index, which covers the largest companies in both developed and emerging markets. 58% of the fund currently invests in the biggest companies in North America, 19% in Europe, 13% in the Pacific, and 9% in emerging markets. Currency this fund is not hedged, meaning you are exposed to currency fluctuations.

Sharesies and InvestNow use the AMP Capital global fund which tracks the MSCI world index. This index invests in large and medium sized companies from 23 developed countries. This index, unlike Smartshares, excludes companies involved with tobacco or weaponry. So it is a partially ethical fund. You will also notice that it doesn’t invest in emerging markets, only developed markets. This is in contrast to the 9% in emerging markets for the Smartshares fund. North America makes up 65% of this fund currently, so a significantly higher weighting in North America than the Smartshares fund. Bear this in mind as it may have an impact on your diversification needs or portfolio overlap. This fund targets an amount of 69% hedged against the NZ dollar.

InvestNow have a third low cost world fund so plenty of options there. This is the Vanguard international fund, which is either hedged or unhedged. I have chosen to analyse the unhedged version because for the long term investor this is the fund with the best after cost returns. Hedged is an unnecessary cost for the long term investor as while currencies may be volatile in the short term, in the long term they tend to remain stable. The hedged version of this fund costs 0.26% in management fees, as opposed to 0.2% unhedged.

This fund also excludes weaponry and tobacco. Normally you would need $500,00 to invest in this fund, so the $250 minimum of InvestNow is a low barrier to entry to what would normally be very difficult to get into this fund. The downside is you need to do your own tax return for this fund. If your fund value is less than $50,000 then you just pay tax on the dividend income. If the fund value is over $50,000 then there are several ways to calculate your tax.

There are two main methods for calculating your tax obligations:

1/. FDR (Fair dividend rate) which calculates your taxable income based on 5% of the funds opening value. For example, if your opening balance was $60,000 and your tax bracket is 30%, you would calculate your tax as $60,000 x 5% x 30% = $900. This method must be used if the value of your fund (capital gain and dividends received) increases by more than 5% annually. It is a bit more complicated than that, with a few exceptions, so it is always recommended to interact with an accountant, especially the first time you are doing this. This is the method that all the other PIE funds use, except the most tax you will pay is 28% of 5% (1.4%). With the InvestNow Vanguard fund you can pay up to 33% of 5% (1.65%) depending on your personal tax rate.

2/. CV (comparative value) which is basically your end of year balance (plus any stock income received from sales) minus your start of year balance (plus total value of purchases). This method should be used if the value of the fund has gained by less than 5% or lost money.

The downside is obviously the extra work and cost needed to do your own taxes. The upside is that you can use an appropriate method of calculating taxes. For example, if the fund returns 2% one year, it wouldn’t be good to pay 5% of the opening balance using the FDR method. You have the option to use the CV method and pay less tax when your fund is not performing as well. The other funds in this analysis are PIE funds and they use the FDR method regardless of returns.

Now that I have given you a headache with all this tax talk, let’s go to the final fund in this battle. The Simplicity growth fund. This fund is a bit different to the others in that it doesn’t entirely track an index. It is not an index fund. It is a managed fund with a mix of growth and fixed assets. I have included it here though because it is a low cost fund that invests internationally and it deserves consideration. This fund invests 48.5% in the same ethical Vanguard international fund that InvestNow uses, except you don’t need to worry about doing your own taxes since Simplicity is a PIE fund. So if you want to invest in this fund but don’t like the idea of doing your own taxes, then Simplicity may be a good alternative. Bear in mind though that it makes up just 48.5% of the fund, not 100% like with InvestNow. Simplicity do hedge their international investments against the dollar if you are looking for that certainty.

The Simplicity fund also invests 29.5% in Australasian equities, 12.5% in international bonds, 7.5% in NZ bonds, and 2% in cash. This calculates to 78% in growth assets (stocks) and 22% in fixed assets (bonds and cash). This may not be aggressive enough for some investors. Because of this, i’m not going to include the results of the Simplicity fund in my declaration of the low cost world fund winner. Because it is not a 100% world fund. This fund is still here though as I didn’t know where else to put it and it is a diversified low cost fund that invests almost 50% in international markets so may be a handy comparison for someone who wants a little bit less risk or an all in one diversified fund that covers multiple asset classes.

If the world fund makes up a large part of your portfolio it is also easy to over diversify. For example, with US markets making up approximately 60% of the Vanguard world fund, it wouldn’t make a lot of sense to also invest in the US500 fund. It’s important to look at the mix of the assets of the fund you are investing in so you don’t have too much overlap among funds. You want to be looking for separation so you can smooth out your risk of being overexposed to one market.

THE DATA

For the data I have assumed investor annual contributions of $600 to meet Smartshares and InvestNow minimum requirements for a level playing field.

For this fund I am assuming a 6% return after costs for all funds.

For the brokerage selling fees I have used ASB Securities rates and fees. Only Simplicity, Superlife, and InvestNow Smartshare fund customers don’t incur selling fees for the world fund. The rest all incur some form of selling costs.

Unlike the previous rounds, I have had to include tax calculations in this battle, since the InvestNow Vanguard fund has a different way of calculating your tax obligations. This to to level the playing field so we are including ALL costs of investing.

I have used the FDR method for the InvestNow Vanguard international fund, with the assumption the investor is on the 30% tax rate. I have assumed annual dividends of 2.5%. So, investors with less than $50,000 are taxed 30% of 2.5%. Investors with more than $50,000 are taxed 30% of 5% of the years opening value. For the other funds, I have also assumed 2.5% dividends, but they are taxed at a top rate of 28%, instead of 30%. This is because they are PIE funds.

Just remember that if you are in a lower PIR tax bracket, then Sharesies and Smartshare investors will need to claim the difference by making a tax refund application. Those two companies will tax you 28% even if your rate is lower.

For the Simplicity fund, since only 60% of the fund is in international bonds and shares, I have only calculated international tax on 60% of the portfolio. The other localised 40% I assumed 28% tax on 4% income which is a benefit of investing locally.

The numbers on the following tables is the price of the fund if it were to be sold at that period in time.

With that out the way, lets have a look at how the fees stack up for an investor who has an investment worth $100, $1,000, $10,000, or $100,000.

INVESTING $100

World fund $100.png

Smartshares, InvestNow and Simplicity are not an option for the $100 investor due to their minimum start up requirements of $500, $250 and $5,000 respectively.

That leaves just Sharesies and Superlife as available fund providers.

Superlife comes out slightly ahead, thanks to a lower annual administration fee of $12, compared to $18 for Sharesies.

At this level of investing we are looking at just a $300 difference over 30 years. So cost is not a huge consideration here. Ease of use and other factors may be more important here. For example, the Sharesies fund is more ethically focused so that may sway your decision. Whereas Superlife invests in more companies with a portion in emerging markets.

The other key difference between these two companies is if your income is less than $48,000 you will need to do a tax return for your Sharesies fund. You do not need to do this for the Superlife fund.

Also note that both these companies use a flat administration fee as part of their charges. For a $100 investor, this can make up a huge chunk of your contributions. It is not until year 9 that your fees become a more reasonable 0.7% with Superlife, and year 13 with Sharesies. If you sell in year 1 your fees will be more than 2%.

Winner Superlife

INVESTING $1,000

World fund $1,000.png

Smartshares and InvestNow are now able to enter the championship ring.

Sharesies is again the highest cost provider across pretty much all time ranges.

Sharesies fund takes 11 years to get to an annual cost of investing of below 0.7%. It’s a long time, and explains their poorer performance.

Two of InvestNow funds are taking a good lead by now. The Vanguard international and AMP global funds are doing well. This is thanks to low management fees. Remember, Sharesies has the same AMP global fund as InvestNow, but the big difference at this point is that InvestNow’s AMP fund has $0 administration fees. Sharesies is $30 per year.

Also recall with the Vanguard international fund you are responsible for doing your own taxes. The numbers include this cost, but you still need to know how to go through that process or pay extra for an Accountant to do it for you.

Winner InvestNow Vanguard international (as long as you don’t sell frequently and don’t mind doing your own tax returns)

INVESTING $10,000

World fund $10,000.png

Sharesies is looking much better with this amount. Their low management fee is helping, and their high $30 administration fee has less of an impact on higher amounts.

Smartshares and InvestNow total world fund have dropped a couple of places to the bottom, and Superlife has jumped them just behind Sharesies. Superlife performs a bit better thanks to a lower management fee than Smartshares and InvestNow TWF. Small percentage differences have big impacts on higher investing amounts. Smartshares also have selling costs when you want to exit the market. Again, the higher the amount invested, the higher the selling cost.

Excluding Simplicity, the two InvestNow funds are in the lead. The AMP Capital fund and the Vanguard international fund. The Vanguard fund is $2,000 ahead of the AMP fund. So, it’s basically a decision of if you think the extra savings are worth 30 years of doing your own tax return. Both funds are ethically responsible if that is important to you. Also bear in mind that the Vanguard fund invests approximately 67% in North America vs the Smartshare TWF that invests 58%. It is worth noting as it may be more important to you to spread your risk across countries.

This data is based on an investor with a 30% tax rate. If your tax rate is lower or higher then the results for this fund may be slightly better or worse.

To further complicate things though there are benefits on the down side of the 6% returns for the InvestNow Vanguard fund. If the fund returns less than 5% you can use the CV method of tax payments which will be far less than the 5% tax paid by the other PIE funds. In other words, your tax options are flexible. With the other funds you are stuck paying income tax with the FDR method.

Surprisingly, the Simplicity fund only costs slightly less than the InvestNow Vanguard fund. I say surprisingly because the returns from the Vanguard fund should be higher than the returns from the Simplicity fund due to the extra risk. This is due to Simplicity’s $30 annual administration fee. InvestNow investors don’t have this fee.

Winner InvestNow Vanguard international (as long as you don’t sell frequently and don’t mind doing your own tax returns)


INVESTING $100,000

World fund $100,000.png

Smartshares and InvestNow world fund continue their slide. Smartshares due to their higher selling costs. InvestNow world fund thanks to a comparatively higher management fee. The larger amounts being invested now just exacerbate their problems.

Superlife, although performing well, just can’t keep up with the lower management fees of Sharesies, InvestNow AMP, InvestNow Vanguard, and Simplicity.

Sharesies and InvestNow AMP fund incur the same management fee. The only difference which gives InvestNow the edge, is the $30 Sharesies administration fee. InvestNow does not charge its customers an administration fee. Sharesies $30 administration fee has less of an impact on higher amounts, hence its improved performance.

Simplicity has performed much better with higher amounts because their $30 administration fee has much less of an impact with higher investing amounts. I can’t declare Simplicity the lowest cost world fund though because technically it is only a 49% world fund. Over 20% of this managed fund is in safer assets.

Winner InvestNow Vanguard international (as long as you don’t sell frequently and don’t mind doing your own tax returns)

FINAL THOUGHTS

InvestNow Vanguard fund works out cheapest for all amounts above the minimum $250 contribution. The other benefit of this fund is that years where your returns are less than 5% or negative, then you can use a more favourable method of tax returns (CV method) than the other funds (FDR method). It always pays to check with your Accountant as there are certain exemptions to the rule.

A couple of caveats with this fund though. Because there is a 0.07% sales fee you can’t be a frequent seller to benefit from this fund. The longer you can leave the funds invested, the more they can compound and grow. If you withdraw too often, then you are better in a fund that doesn’t incur selling costs which would probably be Superlife. You must also be willing to do your own taxes. It can seem daunting at first, but once you have done it once or twice it isn’t that bad. I must say that the InvestNow staff are very helpful and can give you any information you need regarding this. If you are a fan of the Vanguard international fund then it should be worth the cost difference.

Remember that the Simplicity, AMP, and Vanguard funds are ethically invested so that may slightly affect returns in comparison to non ethically invested funds. Costs are important, but are not everything.

Simplicity is the lowest cost, but the growth fund is only half of a world fund. This is a managed fund that could potentially provide you with enough diversification if you don’t want to hold multiple funds, but it can’t claim as a fully international fund like the other funds. Over the long term, the after cost returns of the world funds should perform better than the after cost returns of the Simplicity fund. Just without the diversification and safer assets.

I would rather pick my own index fund portfolio and asset percentages, but the Simplicity fund could be ideal if you are not interested building your own portfolio.

There is a lot of tax information to consider. If your PIE tax rate is less than 28% or your personal tax rate is more than 30%, then the InvestNow Vanguard international will be much less favourable. If you earn $60,000 a year for example, your personal tax rate is 30% and your PIE tax rate is 17.5%. The PIE funds will all charge you the 17.5% tax rate. The InvestNow Vanguard fund will charge you 30% of your taxable income. Big difference and will make the numbers used in this scenario much worse for the InvestNow Vanguard international investor.

If you want to hedge against the NZ dollar, then the higher management cost to do so will also make the Vanguard international fund slightly less favourable.

With the NZ based fund providers, the most tax you pay is 28%. Whereas with the Internationally based Vanguard fund you can pay 30% or even 33% tax based on your personal tax rate.

Its important to run your own numbers as this case study was just performed on one scenario of someone on a 30% personal tax rate and 28% PIE tax rate.

It may seem scary or risky to invest internationally with the extra tax cost, but in a country as small as New Zealand, international investments are essential. It is worth the cost, otherwise we will find ourselves too exposed to the performance of one small market. Ironically, investing smartly in international index funds will lower your risk.

When I say winner, I mean the fund with the lowest fees. Lowest fees does not always mean the best fund for you, so please carefully consider the other features of the different funds highlighted in the introductory article of this 12 part series and make sure that in addition to low fees, the fund also matches your portfolio strategy and is easy to understand.

Next up we will conclude the series with a summary of the findings.


The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here 

Battle of the index funds: Europe fund

Battle of the index funds: Europe fund

Welcome to round 8 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in the Europe fund. We will be comparing the cost between the lowest cost fund providers that can be summarised in the tables below […..]

Battle of the index funds: Emerging markets

Battle of the index funds: Emerging markets

Welcome to round 7 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in the emerging markets fund between 3 of the lowest cost fund providers that can be summarised in the table below […..]

Battle of the index funds: NZ mid cap fund

Battle of the index funds: NZ mid cap fund

Welcome to round 6 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in a NZ mid cap stock fund between 4 of the lowest cost fund providers that can be summarised in the table below […..]

Battle of the index funds: Australasian property and Australian resources

Battle of the index funds: Australasian property and Australian resources

Welcome to round 5 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in Australasian property and Australian resource funds. We will be comparing the cost between 4 of the lowest cost fund providers that can be summarised in the table below […..]

Battle of the index funds: New Zealand Bonds

Battle of the index funds: New Zealand Bonds

Welcome to round 4 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in a NZ Bond index fund between 5 of the lowest cost fund providers that can be summarised in the table below […..]

Battle of the index funds: United States top 500 fund

Battle of the index funds: United States top 500 fund

Welcome to round 3 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in a United States top 500 stock fund between 4 of the lowest cost fund providers that can be summarised in the table below […..]

Battle of the index funds: Australian top 20 fund

Battle of the index funds: Australian top 20 fund

Welcome to round 2 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in a Australian top 20 stock fund between 4 of the lowest cost fund providers that can be summarised in the table below […..]

Battle of the index funds: New Zealand Top 50 fund

Battle of the index funds: New Zealand Top 50 fund

Welcome to round 1 of the battle between the heavyweights. If you haven’t done so already, check out the introduction that sets the tone to this heavyweight battle.

Today we are comparing the costs of investing in a NZ Top 50 stock fund between 5 of the lowest cost fund providers that can be summarised in the table below […..]

Battle of the index funds: Introduction

Battle of the index funds: Introduction

I used to bury my head in the sand when it came to investing because it seemed there were too many options that I stopped trying. It is paralysis by analysis. Well, today I am here to help make things easier. I would hate for you to steer clear of investing because it seemed too difficult. It really isn’t once you get started, and the long term benefits can help set you up for life. Index funds are a big part in my path towards financial independence.

Let’s take a look at the main index fund providers in New Zealand and how they compare […..]

Reader case study 2: Can Stu retire in 7 years?

Reader case study 2: Can Stu retire in 7 years?

Welcome to our second reader case study. This is where I encourage you, the readers, to write in with your situation that you want looked at.

I do my best to answer your questions and provide recommendations for your situation. I also encourage you all to post your thoughts in the comments sections to help out our subject.

Today, we have Stu (not his real name) wanting to know if he can reach financial independence before the age of 55 (7 years) […..]

Know your numbers part two

5/. Net worth

This is the difference between what you own and what you owe. Basically, if we sold everything we own how much money would we have. Bob has $100,000 in investments, $20,000 in savings, $200,000 in house equity, and $50,000 in Kiwisaver. His assets total $370,000.

He owes $10,000 on his student loan and $350,000 on the house mortgage. His liabilities total $360,000.

Bob’s net worth is total assets ($370,000) minus total liabilities ($360,000) = $10,000.

Net worth is a good indication of what position of financial strength we are in. At age 23 a lot of us will have a negative net worth thanks to a student loan.

Some people do not include their house as part of their net worth calculation. The reason being that we all need somewhere to live and if we sold our house we would still need to pay for housing. I understand the point of view, but I still include housing. The reason being that equity in our house can be turned into cash by downsizing, renting out space, or even a reverse mortgage. I don’t include vehicles in my calculation though because I will always need a car and I can’t turn my car into cash flow.

It is your decision on what to include and what not to include, but the key is to keep your calculations consistent. If we keep the variables the same, then we can get a good gauge of our progress. It is quite motivating watching net worth go up. I calculate mine once per month, but you can choose any time frame that suits.  

 

6/. Insurances

It is important to revise how much we are paying in insurance each year. Situations change and if ignored, we may end up paying for far too much or too little insurance. With the birth of our daughter we have had to reassess our life insurance premium and decided we need to add more cover. Whereas, our savings have increased over the last year so we have decided to have higher excesses for our house and contents insurance to save cost.

 

7/. Interest rates

This could range from savings accounts to mortgages to debt. We need to intimately know the interest rates we pay and when they have changed. We need to make decisions on whether to invest or pay off debt on a regular basis, or which debt to pay off first.

 

8/. Kiwisaver fees

For someone investing $10,000 per year in Kiwisaver at 7% returns with annual fees of 1.5%, they will pay $282,000 in fees over the course of 40 years. If we instead only paid 0.5% in annual fees, our fees would only be $112,000. Just by shopping around and paying attention to fees we have saved ourselves $170,000.

 

9/. Emergency fund

It is handy to know how much we have saved in our rainy-day funds. If we don’t know and something bad happens we could find ourselves having to go into bad debt. For more on ideal emergency fund numbers read this article. We all should know how much we have saved so we can determine how many months we can survive on our savings should something bad happen such as a job loss.

 

10/. Mum’s number

I know, not a financial number but still very important nonetheless. Our family is the only one we have, and we should keep in regular contact.

 

Final Thoughts

So there we have it, 10 important numbers that will get your personal finances on track. By tracking our numbers, we can save a lot of money. We can pick up mistakes in our pay checks. We can stop overpaying on certain expenses and fees. We can get better interest rates and credit scores. Not only can we save money, but it is also motivational. Watching our numbers get better ever year is a great motivator once we can see the progress being made. They tell us that we are heading in the right direction. If we don’t know what our numbers are then how do we know we are moving forward?

 

 

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

 

Comments welcome below. How well do you know your numbers? Are there any other important numbers I have missed?

Is a house a good investment?

Is a house a good investment?

This week I had the privilege of being invited to write a guest post on the blog of a fellow kiwi doing great things.

Peti at The Leveraged Mama quit her full time job to allow her to be at home with her child. She is now finding creative ways to earn income from home and you can follow along on her journey as she documents her experiences.

If you’ve ever wondered if your house was a good investment, then look no further. I have collated 25 years worth of regional data and compared this against investing in the stock market.

For the results, you can view the article here.

The beginners guide to retirement part 12:Stress test your retirement plan

The beginners guide to retirement part 12:Stress test your retirement plan

he best retirements are planned. You know what you want to do in retirement. You know how much it will cost. You know how much you will need saved. Less surprises will mean less stress and a greater likelihood of outliving your money.

The problem is life doesn’t always work as planned. We may […..]