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How our low cost ETF portfolio performed in 2016

ETF Watch - Feb 02, 2017

If 2015 was a year to forget for most investors, 2016 was certainly a year to remember, with global sharemarkets rallying, particularly in the back half of the year. Conversely investors in cash and fixed interest assets suffered with cash rates remaining at or near record lows and the threat of future increases in interest rates impacting returns on fixed interest assets.

Back when we first launched ETF Watch, we developed the hypothetical lowest cost ETF portfolio available on the ASX, by trying to match the asset allocation of a number of diversified index portfolios developed by one of Australia’s biggest fund managers against the lowest cost ETFs available on the ASX. Of course cost isn't everything, but it is a metric that is reasonably easy to measure. Today we’ll take a look at how these hypothetical portfolios performed.

A quick look at the portfolio

Our low cost ETF portfolios had management costs of 0.21% to 0.27% pa when we put them together, comprising of ETFs provided by Vanguard, SPDR and Betashares. The good news for investors is the cost of this portfolio has further decreased, although it probably won’t make you rich, with the Vanguard Australian Shares fund (VAS) reducing its management cost from 0.15% to 0.14% pa. The other change is when we first put together the portfolio there were no global infrastructure ETFs available on the ASX, there now is one with Vaneck’s FTSE Global Infrastructure ETF (IFRA). The caveat on this is the Vaneck option is currency hedged, whereas the fund we based our low cost portfolio off is not hedged from what we can tell.

How the portfolios performed

The below chart shows the cumulative performance (share price growth + dividends) of all 5 portfolios in 2016. Where performance in 2015 was just 3.25% to 4.16%, performance in 2016 was a much healthier 3.67% to 8.22%, giving weight to the old mantra that its ‘time in the market not timing the market’ that counts.

How the portfolios performed compared to their ‘benchmark’ portfolios

When we developed the low cost ETF portfolio we used Colonial First State’s risk profile based Index portfolios as our benchmark. We chose Colonial First State for no good reason other than they are a large fund manager and the information we required was reasonably easy to find on their website. We’re not sure what went on with their index portfolios this year but they had phenomenal performance, almost doubling the performance of our low cost portfolio and significantly beating the performance of their actively managed risk profile based portfolios, a complete reversal on 2015 where the ETF portfolios by far outperformed the managed fund portfolios. This goes to show how much performance can differ through slight differences in allocation and indexes even when portfolios on the surface look very similar.

We'll continue to keep an eye on the performance of our lowest cost ETF portfolio and report back periodically how it is going.

This analysis presents factual information only and should not be considered investment advice. The low cost portfolios mentioned in this article are hypothetical in nature and should not be considered a recommendation for an investment portfolio. We recommend investors seek professional advice before investing and do not act on any of the information in this post.

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