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The lowest cost ETF portfolio available on the ASX

ETF Watch - Nov 16, 2015

If you ask a proponent of Exchange Traded Funds (ETFs) why they like ETFs, without a doubt the conversation will soon move to their low cost nature.  It’s true that the majority of ETFs are more cost effective than alternative funds.  This is generally due to the fact that in most cases ETF investors are not paying expert fund managers to outperform the benchmarks, rather the investor is paying for operational efficiency to ensure performance in line with the benchmark.

If we look at the 129 ETFs currently available in Australia, the average management fees are 0.46%, compare this to the 72 LICs that ETF Watch tracks which have an average management fee of 0.94%.  46 of these LICs also have performance fees attached which are generally 15-20% of outperformance of benchmarks.  Of course with LICs and other traditional managed funds, the investor generally pays for fund manager expertise to outperform the benchmark, hence the higher cost.

So if the average fee for an ETF is 0.46%, the question is, what is the lowest cost ETF portfolio someone can put together?  To work this out, we first have to define what a portfolio looks like.  Portfolio construction arguments are not one that we are going to get into at ETF Watch, so we’ve let the experts battle out the standard deviations, correlation coefficients and random variables components of modern portfolio theory, and we’ll use a portfolio already constructed by Colonial First State through their FirstChoice Multi Index diversified portfolios.  There is no science behind why we chose Colonial First State over another fund manager, other than they’ve already put together index portfolios and they are one of Australia’s biggest fund managers and platform providers.

The multi index funds consists of 5 portfolios:

Fund name

Growth Assets

Defensive Assets

FirstChoice Multi-Index Conservative 30% 70%
FirstChoice Multi-Index Diversified 50% 50%
FirstChoice Multi-Index Moderate 60% 40%
FirstChoice Multi-Index Balanced 70% 30%
FirstChoice Multi-Index High Growth 100% 0%

The full split of assets is available in the table below:

  Australian Shares Global Shares Global Shares (Hedged) Emerging Markets Global Infrastructure Global Property Aus Fixed Interest Cash
Conservative 12% 5% 6% 1% 3% 3% 40% 30%
Diversified 20% 9% 10% 1.5% 5% 5% 30% 20%
Moderate 25% 11% 12% 2% 5% 5% 27% 13%
Balanced 29% 13% 14% 2% 6% 6% 25% 5%
High Growth 40% 15% 15% 10% 10% 10% 0% 0%

Next step is to find the lowest cost fund available on the ASX which covers each of the above sectors.  Using the ETF Watch fund database we’ve found the following:

Sector Lowest Cost Fund Management Fee
Australian Shares VAS - Vanguard Australian Shares Index 0.15%
Global Shares VGS - Vanguard MSCI Index International Series 0.18%
Global Shares (Hedged) VGAD - Vanguard MSCI Index International Series (Hedged) 0.21%
Emerging Markets VGE - Vanguard FTSE Emerging Markets Shares 0.48%
Global Infrastructure None Available  
Global Property DJRE - SPDR Dow Jones Global Real Estate Fund 0.50%
Fixed Interest VAF - Vanguard Australian Fixed Interest Index 0.20%
Cash AAA - Betashares Australian High Interest Cash ETF 0.18%

As you can see in the above table, Vanguard dominates the spectrum with lowest cost options.  Global Infrastructure proved problematic with no ETFs currently available that specialise in that area.  To avoid overcomplicating things, we have assumed the allocation to global infrastructure will instead be invested in global property.  The other key observation is some areas such as Australian and Global shares have a multitude of options available, whereas other options such as global property, fixed interest and cash have limited ETFs available.  We’ve used traditional Market Cap ETFs, rather than fancy Smart/Strategic Beta or actively managed funds.

So now that we’ve found the lowest cost funds, let’s take a look at what the total costs of each of these portfolios are if one was to build their own portfolio with the above funds:

Asset Allocation Management costs
Conservative 0.208%
Diversified 0.216%
Moderate 0.220%
Balanced 0.225%
High Growth 0.267%

There you have it, for a little over 20 basis points, an investor can build themselves a diversified ETF portfolio. This doesn’t quite tell the whole story.  Most of these funds have their advertised management fees as well as expense recoveries associated with the costs of being listed on the ASX.  As a result the actual costs to the investor are likely to be slightly higher.  We must also note that whilst these are the cheapest ETF funds, it doesn’t necessarily make them the best, as there’s other factors such as better error tracking (how closely performance matches the index) or tracking an alternate index that may make a higher cost fund a better option.

As a comparison to the above, the costs of the Colonial First State FirstChoice Multi-Index portfolios vary from 0.61% to 0.77% when purchased through the FirstChoice Wholesale platform.  On the surface the cost of this looks considerably higher, however there are differences in the FirstChoice portfolios which may appeal to some investors, this includes consolidated reporting, buy/sell spreads rather than brokerage costs & bid/ask spreads of ETFs, the ability to contribute or withdraw in small regular portions and the fact that the portfolio will be automatically rebalanced.

What are your thoughts, do you use ETFs to create your own diversified portfolios, or do you stick to one or two sectors that you want exposure to?

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