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.

Current as at November 2018

Current as at November 2018

NZ Bond funds are a fund that invests in various Government, municipal, and corporate bonds. Technically, they aren’t index funds as they do not track a market. Instead, the fund managers pick the appropriate investments for their fund portfolio. I am including it in this battle because, like index funds, it is a low cost investment and worthy of inclusion in any portfolio.

Bonds typically return more than you can get from banks, but less than stocks. What percentage of bonds or fixed assets you should own depends on your investment strategy, time horizon, and tolerance for risk.

Sharesies, Superlife, and Smartshares all use Smartshares bond fund managed by Nikko Asset Management. The fund is a diversified mix of government, corporate, bank, and local authority bonds. Government bonds make up approximately 25% of the top ten holdings.

InvestNow’s bond fund is the ANZ Capital fixed interest fund, managed by AMP Investment Management. Government bonds currently make up almost 80% of the top ten holdings. This is much more than the Smartshare fund. Government bonds tend to be safer than corporate bonds, but they tend to have lower returns too. Just be aware of this when making your decision.

Simplicity’s bond fund has a whopping 100% of its top ten holdings in government and local authority’s. Low risk but low return.

You will see in the following tables that cost is important, but also take into consideration the make up of each fund when there are stark differences like we have here. Lowest cost does not always mean best returns after costs.

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 4% return after costs.

For the brokerage selling fees I have used ASB Securities rates and fees. Only Smartshare and InvestNow 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

NZ bond 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 well ahead thanks to lower administration fees, and a lower management fee.

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. You are not paying less than 0.7% in fees with Sharesies until year 21, and year 7 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

NZ Bond fund $1,000.png

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

Sharesies is still the highest cost provider, thanks to the $30 administration fee taking up a high percentage on lower investment amounts. Over 30 years, there is a difference in costs of $1,500 between the Sharesies and Superlife funds. With the low investment amount, it still takes the Sharesies investor 20 years to have annual costs of 0.7% or less.

Sharesies and Smartshares funds have the same 0.54% management fee, but the long term buy and hold investor in the Smartshare fund comes out well ahead. The selling cost after 30 years is far less than the $30 a year adminsitration fee for the Sharesies investor.

Smartshares actually starts out behind Sharesies because of the brokerage fees and initial $30 up front cost. By year 4, Smartshares overtakes Sharesies thanks to the $0 administration and doesn’t look back.

Interestingly, Smartshares has a period between years 9 and 18 where it outperforms Superlife thanks to no administration fee and lower selling fees on lower amounts. The initial $30 start up cost has had more time to be recovered too.

Whereas InvestNow holds the lead for 21 years. After year 21 though, Superlife comes back into its own thanks to a lower management fee (0.44%) on higher amounts making a bigger cost saving impact and takes over both Sharesies and InvestNow. The higher investing amounts help minimise the effect of the $12 Superlife administration fee too.

With the Smartshare and InvestNow 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 these funds will not be right for you. The cost setup encourages holding your investment for the long term and discourages frequent selling.

Winner Superlife

INVESTING $10,000

NZ Bond fund $10,000.png

Similar results to the $1,000 investor except with the higher starting amount, Smartshares and Superlife are really stretching out their lead over Sharesies and InvestNow. Sharesies $30 administration fee is too high, and InvestNow’s 0.57% (plus 0.05% buy and sell) management fee is too high. 

But….enter the arena Simplicity. And enter they do. They take the immediate lead and after 30 years they are $4,000 cheaper than their nearest competitor at this level of investing.

Winner Simplicity

INVESTING $100,000

NZ bond fund $100,000.png

More of the same with $100,000 invested. Simplicity grows the gap significantly. Over $30,000 extra more than Superlife, assuming the same returns. This is a big assumption remember, because Superlife invests in slightly riskier bonds so you would expect greater returns.

Interestingly though, Sharesies makes strong headway on Smartshares, and overtakes InvestNow. The reason for InvestNow and Smartshares poorer performance with higher investing values is the brokerage (selling) fees of having a big impact on higher values. Sharesies $30 administration fee also has a lower impact on higher investing amounts. If we had $200,000 invested, then Sharesies would also overtake Smartshares at that point.

This time around Smartshares takes 13 years to catch up to Sharesies thanks to high brokerage selling costs on the higher investment amounts.

Winner Simplicity

FINAL THOUGHTS

Simplicity is the clear low cost winner for all time periods and all investing amounts over $5,000. In fact, as the investing amounts get bigger so too does the benefit of Simplicity over the other funds. The combination of administration and brokerage fees of the other funds can’t match Simplicity’s low 0.1% management fee.

It’s important to remember the differences between the funds though. Sharesies, Superlife and Smartshares all use the same fund. InvestNow and Simplicity use different funds and track different types of bonds with lower risk.

You will need to consider how much risk you want to take and the make up of the bonds you want. Read each companies product disclosure statements and fund updates for more information on their bond holdings. Then weigh that up against the cost.

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 compare the costs of the Australasian property and Australian resources funds.


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