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Australian index ETF showdown: IOZ, STW & VAS compared

ETF Watch - Nov 20, 2016

Whilst all the excitement in recent times has focused on the proliferation of Smart Beta and Actively Managed ETFs, our look at the top ETF inflows for FY2016 showed that by far the most popular ETFs remain the traditional index weighted funds. For those looking for exposure to the broad Australian market, there’s 3 funds which dominate this space, these being iShares S&P/ASX 200 ETF (IOZ), SPDR S&P/ASX 200 Fund (STW) and Vanguard Australian Shares Index (VAS). These funds all featured in the top 20 ETF inflow list for FY2016, with two featuring in the top 10. Below we outline the key attributes of each fund.

Ticker IOZ STW VAS
Name iShares S&P/ASX 200 ETF SPDR S&P/ASX 200 Fund Vanguard Australian Shares Index
Benchmark S&P/ASX 200 S&P/ASX 200 S&P/ASX 300
Manager iShares (Blackrock) State Street Global Advisers Vanguard
Market Cap $475m $3,101m $1,680m
FY2016 new flows $106m $189m $499m
Inception date December 2010 August 2001 May 2009
Management costs 0.15%pa 0.19%pa 0.14%pa
Bid / Ask Spread ~0.09% ~0.04% ~0.07%
Average daily volume 45,000 units 160,000 units 49,000 units
Average daily volume ($) $1.0m $8.1m $3.4m
Dividend Frequency Quarterly Quarterly Quarterly

The table above shows the funds all share very similar attributes. VAS tracks a slightly different index, the S&P/ASX 300 index, rather than the S&P/ASX 200 index which IOZ & STW track, however over 95% of the S&P/ASX 300 index is made up of the top 200 companies. Because of this, investors in VAS will receive slightly higher exposure to small & mid caps.

VAS has the lowest management fees (by what some would call an immaterial 0.01%pa). All funds have high liquidity and volume however the bigger the fund the more liquidity as you would expect, and also the lowest average Bid/Ask Spread. For those seeking a steady stream of dividends all now offer quarterly distributions.

Until December 2015, IOZ tracked the alternative Australian benchmark, the MSCI Australia 200 Index. Management decided at this point to move to the more widely known S&P/ASX 200 index. 

How has performance differed?

As it can be seen above, there are subtle differences of these funds, but they are pretty similar, so maybe it comes down to performance to find the winner. Below we have tracked the performance of a hypothetical $1,000 invested in each of the options in December 2010 (when the last of the funds, IOZ was launched).

As expected, performance of the three funds over the period was quite similar. Until they changed their benchmark, IOZ performance didn’t quite track STW & VAS, however since changing benchmarks, performance has been very similar. The chart shows $1,000 invested in December 2010 would be worth $1,101 for IOZ and $1,120 for both STW & VAS at the end of October 2016.

What about the impact of dividends?

Of course, performance charts only tell half the story, with dividends in Australian based equities playing a large part of the overall performance. Below you can see the impact of hypothetically reinvesting the distributions received from each of the funds over the period.

You can barely see it from the chart, but there are 3 lines plotted, the performance is so similar across all three funds that it looks like a single line. The $1,000 invested would be worth $1,435, $1,440 and $1,442 across IOZ, STW & VAS at the end of October 2016.

What the above does not tell is the franked components of the distributions received. Higher franking credits can mean higher overall returns for shareholders on low tax brackets. Below the percentage income return and franked component is tracked for all 3 funds.

The above shows reasonably consistent income distributions across all three funds. There was a spike in IOZ distributions in 2015, presumably due to needing to re-weight to a new index, additionally the data available to us shows no franking credits in 2011 for IOZ. We’ll assume that is an anomaly, possibly as it was a new fund at that time. The average dividend / franking components of each fund from 2011 - 2015 have been summarised below: 

Fund Average Annual Dividend Yield Average Franked Component
IOZ 4.44% 59%*
STW 4.39% 77%
VAS 4.59% 64%

​*Excludes 2011 dividends from calculation.

Whilst STW has the lowest yield by a small margin, it has the highest franked dividend component, indicating lower portfolio turnover than the other two funds (who it can be assumed are returning more capital gains to investors).

So, which fund is the best?

These three Australian index ETFs share many similarities, but a few key differences. There’s no clear ‘best option’, but some differences that may make some funds more appealing to certain investors.

  • IOZ and STW share the same S&P/ASX200 index, whereas VAS provides slightly higher exposure to smaller cap shares, tracking the S&P/ASX300 index.
  • IOZ and VAS have lower management fees, however STW tends to have lower bid/ask spreads.
  • STW historically has returned slightly lower distributions than IOZ and VAS but with a higher proportion of franking credits attached.
  • STW is Australia’s largest ETF, whereas VAS currently receives higher inflows.

We hope this analysis was helpful to investors who are seeking a large cap Australian ETF. This analysis presents factual information only and should not be considered investment advice. We recommend investors seek professional advice before investing in any of the funds mentioned.

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