The rise of ETFs has brought low cost investing to the masses. One of the first things an advocate of ETFs will quote is their low cost, which ultimately means more money stays with the investor rather than the fund manager.
We remember a time not that long ago where investors in managed funds would pay over 2% per annum in management fees for a basic product designed to track the index. This generally included a hefty trailing commission to be paid to a financial adviser whether you used their services or not.
Times have changed, and now investors can access a broad range of strategies via ETFs for under 0.50% pa, using just their brokerage account to buy and sell the products.
Betashares have shifted the goal posts, with their Australia 200 ETF (A200), they have reduced management costs to 0.07% per annum, half the cost of their closest competitor. Today we take a look at A200.
A200 is a simple product, designed to track the top 200 companies by market capitalisation on the ASX. It will rebalance its portfolio quarterly and pay dividends on a quarterly basis. There really isn’t much more to say about it than that!
A200’s greatest competitors are Vanguard Australian Shares (VAS), iShares S&P/ASX 200 ETF (IOZ) and SPDR S&P/ASX 200 Fund (STW). We took a look at these three funds some time back. All manage over $1b in assets now and are three of the largest ETFs available in Australia. VAS cost is 0.14% pa, IOZ is 0.15% pa and STW is 0.19% pa. All offer quarterly distributions.
The key difference between A200 and the other three products is the index being used. VAS tracks the S&P/ASX 300 index and both STW and IOZ track the S&P/ASX 200 index. A200 tracks a newly created index, the Solactive Australia 200 Index. The index is so new in fact that we can’t yet find it on Solactive’s website.
Whilst all indexes are designed to track the Australian share market by market capitalisation, the devil can be in the detail. For example the S&P/ASX 200 index has certain eligibility criteria around a company’s liquidty. Nevertheless, we expect portfolios to be so similar in their construction that any differences could be called a rounding error.
A large proportion of an ETFs cost is associated with the index it tracks, with fees required to be paid by the ETF issuer to the index provider. We expect a large factor of Betashares being able to offer A200 at such a low cost is the fact that they have used Solactive to create the index, rather than the much better known (and likely more expensive) Standard & Poors.
The below chart outlines the top 10 holdings of A200, compared to IOZ at 30 April 2018:
You can see the differences in the top 10 funds are minimal.
There’s a few other things you should consider before investing in A200:
The Bid/Ask spread is the difference in share price between buying and selling an ETF. A market maker exists to create and redeem ETF units. They make a profit by paying a little less for units that they buy than units that they sell. Kind of like how when you travel the foreign exchange merchant will see you foreign notes for more than they will buy them back from you. Large, liquid ETFs tend to have a small bid/ask spread as there is high turnover and large secondary market (like how the spread between US dollars at your currency exchange is less than Chilean Pesos).
At the time of writing A200 has only been listed for one day, so we can’t determine it’s bid/ask spread, but it is something for investors to be mindful of. When we looked at STW, IOZ and VAS, their bid/ask spread was 0.04% to 0.09%.
Betashares has begun operation with a market capitalisation of almost $50m, much higher than the standard ETF issue of around $2m. We assume some institutional investors have got on board early, and hopefully this helps to provide adequate liquidity.
We often see new ETFs come to market and have a dividend yield slightly lower than expected during the first couple of years of operation. This is due to timing of fund flows and dividends. As a fund goes from a very small size to a much larger size its growth in the first couple of years is exponential.
With distributions paid quarterly, a dividend received by the fund at the start of the quarter may then need to be paid to a much larger pool of investors at the end of the quarter, meaning the dividend yield for all investors becomes less.
To provide an example. If CBA pay a dividend of 5% at the start of the quarter, and the fund holds $1,000 worth of CBA shares, they will receive a dividend of $50. If by the end of the quarter they hold $1,500 worth of CBA shares (as more investors have contributed to the fund), they will still pay out $50 worth of dividend, but the income yield to investors will be $50/$1,500 = 3.33%.
We don’t expect in reality to see examples so extreme, but investors relying on income distributions should be aware that yield may be slightly lower initially. This won't affect overall performance (share price + dividends), just income yield.
Since Betashares announced the launch of A200 last month, we’ve seen a number of people on social media ask ‘should I sell my VAS/IOZ/STW and buy A200?’. We remind investors that whilst A200 is 50% of the cost of its nearest competitor, it means management costs will be $7 for every $10,000 invested. We’re talking small change not big bickies, and investors should consider things like capital gains tax and transaction costs (brokerage and bid/ask spreads) before making any such decisions.
We’re excited by the launch of A200. In the US, where the ETF market is much more mature than here, low cost ETFs are used heavily by institutional investors. This ensures the ETF market continues to grow and ultimately helps drive down costs to retail investors, a move which we support.