News & Commentary

Insights into future of lower-cost investments 24 May 10

Personal finance journalist Annette Sampson provides a telling insight into retail investment opportunities in her latest column (“A super chance to snap up a cheaper deal” BusinessDay.com.au, May 22, 2010) by saying: Retail investors can generally find an expensive way and a cheap way of investing.

“Just about any investment you can think of has cheap and more expensive alternatives,” Sampson writes in the Fairfax press.

“Want to buy a managed portfolio of shares? Well, you could go for an index fund or Exchange Traded Fund with fees well under the 1% mrk,” she says, “or you might prefer an active fund that gives similar performance for an annual fee of 2% o more.”

Sampson then moves on to discuss her expectations that the popularity of lower-cost investments will markedly grow with the federal Government’s proposal to ban financial advisers from charging commissions to retail  investors from July 2012. (Smart Investing discussed this point on April 30).

In her piece, Sampson particularly highlights how Exchange Traded Funds (ETFs) will be among the likely beneficiaries of a no-commission world.

“ETFs are a major growth investment overseas though still in their early days in the Australian market,” she writes. But with no entry or exit fees, ETFs provided a low-cost way for investors to obtain wide exposure to shares and other assets.

As Smart Investing has often discussed, the annual growth in the total market capitalisation of ETFs listed on the Australian market is remarkable – rising 134% i the 12 months to April 30 to reach $3.4 billion, according to the ASX. This percentage increase is, of course, still from a relatively low base.

In the US market, for instance – where ETFs are a much-longer established – the funds are among the most-traded stocks.

A recent feature in The New York Times by journalist Conrad de Aenlle notes that both conventional unlisted index funds and ETFs have enjoyed strong investment inflows in the US over recent years.

“The trends indicate a broadening realisation that the lower costs of running and owning both kinds of funds give them an edge in performance that’s hard to overcome over the long term,” de Aenlle writes.

“Index fund mangers have no research to conduct or buy, make no visits to companies and trade relatively few securities. ETFs have additional cost advantages.”

And he quotes Scott Burns, director of ETF analysis at investment researchers Morningstar in the US as saying: “What you’re seeing is more advisers embracing lower-cost asset-asset allocation strategies and embracing ETFs. They’re throwing up their hands and saying, ‘I don’t want to beat the index; I want the index.’”

This is a reflection of the lower-cost future of investment products.

* Written by Robin Bowerman, Head of Retail at Vanguard Investments Australia.
To receive this column by email each week, register with Smart Investing.

What can I do next?

• See Prices & Performance data for Vanguard funds
• Learn more about our Managed Funds up to $500,000
• Lean about our Managed Funds over $500,000
• Discover our Exchange Traded Funds
• Order or download a 2009 Index Chart
• Contact Client Services