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.

Current as at November 2018

Current as at November 2018

The emerging markets 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 international companies and are able to accept some market volatility. The companies in the emerging markets index consist of businesses in countries that are not as developed as the United States. China takes up one third of the fund. Taiwan, India, Brazil and South Africa round out the top 5 nations in this fund which make up three quarters of the fund. Emerging markets are basically countries and markets that are not mature. An emerging market aims to progress towards becoming more advanced through technology and growth.

Generally, emerging markets have better returns over the long term. They have more room to grow. They are cheaper to buy. They have fewer regulations and looser monetary policies. However, they are also more risky. Their countries tend to be lower income, higher unemployment and more volatile social and governmental instability. Smaller size companies have more room to grow, but they also have a greater likelihood of failure. Your decision will be based on your investment strategy, investment timeframe, and your tolerance for risk.

This fund should ideally make up a relatively small percentage of someones portfolio. More developed market international stocks and local investment exposure is needed for a more balanced portfolio.

All funds are identical in the sense that they track the same companies in the emerging market index. All companies invest via the Smartshares EMF fund, with the only difference being each companies cost structures and user platforms.

THE DATA

For the data I have assumed investor annual contributions of $600 to meet Smartshares 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 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

Smartshares is not an option for the $100 investor due to their minimum start up requirements of $500. InvestNow does not offer a cheap enough alternative to be considered and Simplicity does not offer this fund.

That leaves just Sharesies and Superlife as available fund providers at this level of investment.

Superlife comes out slightly ahead, even though it has a higher management fee. This is thanks to a lower annual administration fee of $12, compared to $18 for Sharesies.

At this level of investing we are only looking at a $250 difference over 30 years for the same fund.

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 18 that your fees become a more reasonable 0.7% with Superlife, and year 24 with Sharesies. If you sell in year 1 your fees will be more than 2%.

The difference between the two funds is minimal. That being the case, the decision here should be less about cost and more about which company you prefer to invest with.

Winner Superlife

INVESTING $1,000

Emerging markets $1,000.png

Smartshares are now able to enter the championship ring.

Sharesies is again the highest cost provider across all time ranges. Over 30 years, there is a difference in costs of almost $2,000 between Sharesies and Smartshares. This is thanks to Sharesies high annual administration fee costing more than Smartshares’ selling costs. Smartshares have a lower management fee which also helps.

Sharesies fund takes 22 years to get to an annual cost of investing of below 0.7%. It’s a long time, and explains their poorer performance.

Winner Smartshares

INVESTING $10,000

Pretty much identical results to the $1,000 investor.

Winner Smartshares

INVESTING $100,000

Superlife has suffered from this increase in investments, falling off the pace. The reason for Superlifes poor performance with higher investing values is the higher management fee of 0.63% having a big impact on higher values.

Smartshares lead is also greatly reduced by Sharesies because Smartshares selling costs start to eat more into higher amounts, and Sharesies high administration fee is less of an issue with higher amounts.

In fact, once we extrapolate out to an investment amount of $140,000 Sharesies will overtake Smartshares and take the lead.

Winner Smartshares

FINAL THOUGHTS

Smartshares is the clear winner for all time periods where the investing amount is greater than $500. If you manage to invest over $140,000 in this fund then Sharesies fund will be the pick.

Update March 2019: due to the introduction of a new emerging market fund from InvestNow, they are the new ‘winner’. You can check out the findings here

This is a shame for Sharesies and their customers. Sharesies colours, design and language are a drawcard for younger investors with smaller amounts, yet their flat annual pricing model is more competitive for customers with higher investment amounts. More so than those with lower investment amounts who they are trying to target.

By 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 compare the costs of the Europe 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