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.

Current as at November 2018

Current as at November 2018

The US Top 500 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 500 American companies. The fund tracks the S & P 500 index. Ideally you are able to accept some market volatility.

This is a fund that could potentially result in overdiversification. If you already own a worldwide index fund, then a US500 fund would add a significant amount of duplication, as a lot of the US top companies are also in most worldwide funds. If you must have both funds, I would recommend that the US500 only makes up a small percentage. If you don’t have a worldwide fund, then you can probably have a higher percentage in the US500 fund.

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

With management fees as low as 0.34% this is one of the lowest cost stock index funds in New Zealand.

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

US500 $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. Simplicity is also not in the mix as they don’t have this fund.

That leaves just Sharesies and Superlife as available fund providers.

Superlife comes out on slightly ahead this time around. Despite having a higher management fee (0.44% vs 0.34%), Superlife’s slight edge comes thanks to a lower annual administration fee of $12, compared to $18 for Sharesies. The difference between the two companies is so small that you should probably base your decision here on other factors such as ease of use, ease of tax returns, and other factors discussed in the first article in the series.

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 0.6% in fees with Sharesies until year 14, and year 10 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

US500 $1,000.png

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

Sharesies is again the highest cost provider, with the exception of years 1-3 where Smartshares takes the wooden spoon. Over 30 years, there is a difference in costs of almost $2,000 between Sharesies and InvestNow funds.

Superlife comes in second last in terms of fund costs, slightly ahead of Sharesies thanks to lower admin fees. This is despite Superlife’s higher management fee. Sharesies has closed the gap though thanks to a lower management fee.

Smartshares actually starts out behind Sharesies because of the brokerage fees and initial $30 up front cost. By year 4, Smartshares overtakes Sharesies and doesn’t look back. Smartshares brokerage fees ensure it never catches up to InvestNow, despite them both having the same 0.34% 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.

InvestNow like a bull out of the gate smokes the competition here. With a low management fee of 0.34%, no annual admin fee and no selling costs, they will be hard to beat.

Winner InvestNow

INVESTING $10,000

Similar results to the $1,000 investor except with the higher starting amount, Smartshares and InvestNow are really stretching out their lead thanks to higher investing amounts and $0 administration fees. $3,000 ahead of last placed Superlife.

Yes, Sharesies have found a fund where they don’t come last in costs. They have overtaken Superlife quite comfortably as a result of Superlife’s relatively higher management fee. Sharesies higher administration fee does not make as big an impact with higher investing amounts.

With the higher investment value, the Smartshares fund takes only 2 years to overtake the Sharesies fund, instead of the 4 years it took the $1,000 investor. This is because at this level of investing, the Sharesies investor incurs $30 administration fees from year one, instead of $18 for the lower value investor.

Winner InvestNow

INVESTING $100,000

More of the same with $100,000 invested. Interestingly though, Sharesies makes strong 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 $135,000. With 0.3% brokerage selling fees, Smartshare funds do not fare well in portfolios with higher balances.

This time around Smartshares takes 18 years to catch up to Sharesies thanks to high brokerage selling costs on the higher investment amounts.

Superlife really falls of the pace, falling $15,000 behind next placed Sharesies, and $17,000 behind InvestNow. This is a combination of an administration fee and a higher management fee.

Winner InvestNow

FINAL THOUGHTS

InvestNow is the clear winner for all time periods and all investing amounts over $250. In fact, as the investing amounts get bigger so too does the benefit of InvestNow over the other funds. The combination of administration and brokerage fees of the other funds can’t match InvestNow’s $0 brokerage and administration fees.

Superlife never really recovers from its relatively higher management and administration fees.

Sharesies performs a bit better than they have with their funds in the first two articles thanks to a management fee that is 0.1 percentage points lower than Superlife’s.

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 return to New Zealand and compare the costs of the five cheapest bond 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