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.

Current as at November 2018

Current as at November 2018

The Australian Top 20 fund is a stock market index fund and is ideal for investors buying for the long term (10 years plus), that want to invest in the largest 20 financial products (such as banks) within the Australian stock exchange. Ideally you are able to accept some market volatility. This fund should ideally make up a small percentage of someones portfolio. It is a niche product offering that is not very diversified. However, it can add some diversification to a portfolio that is already well diversified locally and globally.

A broader stock and/or bond exposure is needed for a more balanced portfolio than this fund provides on its own.

All fund issuers use Smartshares so there is no difference in the product offering between companies.

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 the brokerage selling fees I have used ASB Securities rates and fees. Only Smartshare customers incur selling fees for this fund.

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

$100.png

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

That leaves just Sharesies and Superlife as available fund providers.

Superlife comes out well ahead, after 30 years thanks to a lower annual administration fee of $12, compared to $18 for Sharesies. The Superlife management fees of 0.49% are also 0.11 percentage points cheaper than Sharesies 0.6% management fee. The difference for periods of less than 10 years is not significant because of the small amount invested.

At this level of investing we are looking at a $2,000 difference over 30 years.

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. By year 7 you are still paying 1.21% in fees with Sharesies and 0.73% with Superlife. Pretty high rates for passive funds. If you sell in year 1 your fees will be more than 2%.

Winner Superlife

INVESTING $1,000

$1000.png

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

Sharesies is again the highest cost provider across all time ranges. Over 30 years, there is a difference in costs of $2,300 between Sharesies and Superlife funds.

Sharesies fund, with their admin fees, takes 24 years to get to an annual cost of investing of below 0.7%. It’s a long time, and explains their poorer performance.

Smarthsares comes in second last in terms of fund costs, still well ahead of Sharesies though thanks to no admin fees. This is despite Smartshares brokerage selling costs. Smartshares actually starts out behind Sharesies because of the brokerage fees and initial $30 up front cost. By year 3, Smartshares overtakes Sharesies and doesn’t look back. Smartshares brokerage fees ensure it never catches up to InvestNow, despite them both having the same 0.6% management fee.

With the Smartshare fund incurring a selling cost each time you sell, it is important to buy and hold if you are to use this fund. If you want to frequently sell, then this fund will not be right for you. The cost setup encourages holding your investment for the long term and discourages frequent selling.

The other interesting realisation is that the InvestNow fund is at a lower cost than the Superlife fund during the first 25 years despite having a much higher percentage fee. 0.6% vs 0.49%. This is thanks to InvestNow’s $0 admin fee. With higher investment values, Superlife catches up because their $12 admin fee is spread out over higher values. Superlife’s low management fees of 0.4% are no competition over the long term for the 0.6% in the other three funds.

Winner Superlife for longer than 24 years. InvestNow for 24 years or less.

INVESTING $10,000

$10000.png

Similar results to the $1,000 investor except with the higher starting amount, Superlife is really stretching out now thanks to higher investing amounts and low management fee offsetting the $12 admin fee. $4,000 ahead of last placed Sharesies, and almost $2,000 ahead of its nearest competitor InvestNow after 30 years.

With a $10,000 investment amount, it only takes the Superlife investor 2 years to catch the InvestNow investor. Much quicker than the 24 years it took the $1,000 investor.

With the higher investment value, the Smartshares fund takes longer to overtake the Sharesies fund. 6 years, instead of the 3 years it took the $1,000 investor. This is because of Smartshares brokerage selling costs. Because the fund value is higher, so to are the brokerage costs. Meaning the fund takes longer to get ahead.

Winner Superlife

INVESTING $100,000

$100,000.png

More of the same with $100,000 invested. Interestingly though, Sharesies makes a little bit of headway on Smartshares. The reason for Smartshares poor performance with higher investing values is the high brokerage (selling) fees of 0.3% having a big impact on higher values. I ran some more numbers and Sharesies would overtake Smartshares with a starting investment of $150,000. With 0.3% brokerage selling fees, Smartshare funds do not fare well in portfolios with higher balances.

This time around Smartshares takes 19 years to catch up to Sharesies thanks to high brokerage selling costs on the higher investment amounts.

Superlife is over $16,000 cheaper than its nearest rival InvestNow over 30 years and $1,750 over 10 years.

Winner Superlife

FINAL THOUGHTS

Superlife is the clear winner for all time periods and all investing amounts. In fact, as the investing amounts get bigger so too does the benefit of Superlife over the other funds. The 0.6% management fees of the other three funds can’t match Superlifes 0.49%

There is one exception. If you are investing for less than 10 years with $10,000 or less, or 24 years with $1,000 or less, then InvestNow will perform slightly better than Superlife thanks to having no annual administration fee.

Sharesies never really recovers from its relatively higher administration fee.

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 continue our journey around the world and compare the costs of the United States 500 fund.


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