Index Fund: Lower Fees, Reliable Growth, Less Volatility

This article explains how Index funds work and tries to simply explain their benefits and disadvantages.

Index share funds typically have lower fees than active managed funds & you can rely on receiving capital growth and a dividend income return similar to the market as a whole.

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Index funds are best suited to investors who recognise that shares outperform most other asset classes over the long term and want to allocate their share investments in a way that removes the chance of an incompetent active fund manager achieving a return less than the market average (eg: Australia’s ASX300 index).

Some comments on index funds follow:

In the 1996 Berkshire Hathaway Annual Report, legendary investor Warren Buffett wrote: “Most investors, both institutional and individual, will find that the best way to own common stocks (‘shares’) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.”

In his letter to shareholders in early 2008 Buffet repeated:

Naturally, everyone expects to be above average. And those helpers (bless their hearts!) will certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below average.

The reason is simple:

1) Investors, overall, will necessarily earn an average return, minus costs they incur;

2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low;

3) With that group earning average returns, so must the remaining group – the active investors. But this group will incur high transaction, management, and advisory costs. Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group – the “know-nothings” – must win.

“I know it’s hard to think about the next 20 years in the midst of a violent bout of sharemarket volatility and correction, but this is exactly the time when you must. That doesn’t mean you should just buy the index, although given the low fees of index funds and exchange traded funds, you could do worse. That would certainly be better than paying 2% fees for an actively managed fund that will be lucky to match the index anyway.”
– Alan Kohler in the “June 2006 ASX Investor Update email newsletter”

“index funds are worth considering. They match, mirror or mimic a sharemarket index. With a decade to invest, it makes the most sense as there is plenty of time to ride out the inevitable market corrections and maximise returns. The beauty of indexing is that there is no risk of picking a dud fund manager who may underperform the market and the fees for an index fund are much less than those charged by active managers”
– John Collett in the Age article “Build a future fund ”

vanguard vs colonial first state

When you invest “with” the market – whether through index funds, ETFs or Three Factor strategies – you start to focus on other aspects of investing that are important to having a successful investment experience, including: Keeping fees low, Keeping taxes low (our last active managed fund survey showed how much tax was paid from the high levels of income paid), Having a well diversified portfolio, Focusing on asset allocation as a key driver of returns.

A commentary on index-style investment options would not be complete without a few comments on their flaws. First, buying into an index fund means that you are buying into a portfolio with capital gains, which is not an ideal solution. And index funds, while having a lower level of trading compared to active managed funds, still have some level of trading as investors come and go from a fund – what we might describe as “liquidity trading”.
– Invest “with” the market By Scott Francis – Eureka Report October 15, 2007 edition

The Efficient Market Theory is fundamental to the creation of the index funds. The idea is that fund managers and stock analysts are constantly looking for securities that would out-perform the market. The competition is so effective that any new information about the fortune of a company will translate into movements of the stock price almost instantly. It is very difficult to tell ahead of time whether a certain stock will out-perform the market.

If one cannot beat the market, then the next best thing is to cover all bases: owning all of the securities, or a representative sampling of the securities available on the market. Thus the index fund concept is born.

Because the composition of a target index is a known quantity, it costs less to run an index fund. No stock analysts need to be hired.

In Australia the annual fee for most active retail managed share funds is around 2%. In comparison the annual fees for a retail passive index share fund are 0.5-0.8%.

As a specific example, the well regarded “Perpetual’s Investor Choice Funds – Australian Share Asset Group” charges a flat management fee of 1.95% p.a. (per annum/year) regardless of the amount invested.

In comparison the popular “Vanguard Index Australian Shares Fund” charges a management fee of 0.75% p.a. for the first $50,000 reducing further the more you invest eg: 0.50% p.a. For the next $50,000 and 0.35% p.a. for the balance over $100,000.

This means that given all else is equal the Perpetual fund needs to outperform the Vanguard fund by at least 1.2% to achieve the same return after fees.

ABC TV’s “Lateline Business” host Ali Moore interviewed chairman and CEO of the Vanguard group Jack Brennan about the managed funds industry on 17/10/2007:



Benefits of Index Funds

  • Lower fees – Earnings from the stock market are unpredictable whether you invest in a passive index fund or an active managed fund. However fees arfixed and known from the start so investing in an index fund gives you a head start due to the inherantly lower fees (see Perpetual vs Vanguard comparison above)
  • Less Volatility and Worry – because Returns and Dividends will roughly match the overall stock market (before fees). Regardless of whether the market is rising or falling you know that your investment is following the same trend and although you won’t earn much better than the index, on the flip side you won’t lose any more than the index either.

    In comparision with an actively managed fund you may earn more than the market, but you’re equally likely to earn less if the manager of your actively managed fund makes bad decisions.

  • Possible tax advantages – because index funds usually have less turnover than actively managed share funds
  • Diversification Benefits – Active managers typically only hold a subset of securities that are contained in the index. Index funds, by their very nature, effectively hold the market which may have diversification benefits.

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Disadvantages of Index Funds

  • Index funds returns will track the market return. There is no possibility of outperforming the market as actively managed funds claim they can do.
  • Index share funds are still inherantly risky over the short to medium term compared to cash investments and may fall in value if the overall market falls.
  • Index funds generally hold shares in companies in similar proportions to the index. Therefore Index funds will have large exposures to industries that dominate the index eg: Resources or banks

Overall there are many benefits to investing in Index funds, In fact, 7 out of Australia’s top 10 super funds use indexing (Source: By FUM, Rainmaker and Vanguard)

Note: As with any other investment you should not put all your eggs in one basket. It’s far safer to diversify across different asset types and investment management companies to lower the risks. As an example it may be wise to hold a large “core” proportion of investments in index funds and individually invest in other asset types such as actively managed funds, property, bonds and cash.

Lastly, if you do decide to invest in Index funds, make sure you invest directly in your own name and not via a financial advisor because they add no value and will take part of your money in fees for filling in a few pieces of paper. The reason many financial advisors don’t like to recommend index funds is because they tend not to pay kickbacks/commissions to financial advisors who recommend them.

Disclaimer: The author had investments in both Perpetual actively managed funds and Vanguard passive index funds at the time this article was written.

This information is general in nature and not tailored to your situation. It is not financial advice. You should read and consider the Product Disclosure Statement of any investment fund before deciding whether to invest in it.

47 thoughts on “Index Fund: Lower Fees, Reliable Growth, Less Volatility”

  1. Only a few days after I published this index funds article, I noticed 2 articles in the SMH that backup my argument

    Excerpts follow:

    “He [Professor of Economics at Princeton University] says trying to predict which fund managers will beat the market is an impossible task and likens it to trying to find a needle in a haystack. He says most investors, over the long term, are better off investing in the haystack” [via index funds].

    – from article: “Prof offers fund of advice” – SMH 23/08/2006

    “Index funds are generally more tax-efficient because they tend to buy and hold rather than indulge in wholesale share trading. This means they generate a higher proportion of their return as long-term capital gains whereas an active fund manager might generate a higher return through trading, but leave investors with a hefty tax bill on their annual distribution because it includes a high proportion of realised short-term gains”

    – from article: “It’s what goes into your pocket that’s important” – SMH 26/08/2006

  2. I am interested in investing in index funds but on looking at Vangard site the minimum investment is 500,000-I don’t have that much at present only about 100,000 any ideas of other places to go?
    Thanks Janet

    EDITOR:
    Not sure where you got the 500,000 minimum figure from … perhaps you were looking at their wholesale funds section.

    According to the Fund Profile for the Vanguard Index Australian Shares Fund the Minimum Initial Investment is $5,000

    The same 5,000 minimum applies for any of their other retail index funds

    I can’t suggest any particular fund but keep in mind that the management fees may differ depending on how much you invest into any particular fund eg: for the Vanguard Index Australian Shares Fund:

    Management Costs (as at 18/09/06):
    0.75% pa – for that portion up to $50,000
    0.50% pa – for that portion from $50,001 to $100,000
    0.35% pa – for that portion over $100,000

  3. Hi informative article and thanks for the link to vanguard index fund. Do you know of other index funds in Australia for small retail investors? Will be nice to have a few options to compare.

    EDITOR: To the best of my knowledge Vanguard index funds are the only choice in Australia for small retail investors who want to benefit from the low fees, but only have a few $1000 to invest

    Other index funds run by companies like Macquarie, AMP, Barclays and State Street Global are only interested in people who have a minimum of several $100,000 or even minimum over a $1,000,000 to invest

  4. FYI I just learnt about an interesting index fund product called Macquarie True Index Australian Equities which guarantees your investment will exactly match pre-tax index returns against the S&P/ASX 300 Accumulation Index, the main caveat is that it requires a minimum investment of $AUS 500000

    In essence if you join the fund you’re making a bet between you and Macquarie. If the fund underperforms the S&P/ASX 300 Accumulation Index than Macquarie makes up the difference, if it outperforms the S&P/ASX 300 Accumulation Index than Macquarie gets to keep the pre-tax outperformance difference as a kind of “performance bonus fee”

  5. Etrade Australia allows purchase of wholesale Vanguard index (plus others) funds in smaller amounts, I guess they agregate the orders .. the offset here is you have to pay the etrade fees for them to manage your account, but they aren’t much.

    EDITOR: I think the Etrade managed fund fee of 0.66% on top of the wholesale managed fund fee plus the inherant delays in pricing for purchasing/selling units because you’re buying/selling through an intermediary mean it’s not worth using such a service

  6. What do you think of Exchange Traded Fund (ETF)? I just found out from a friend that some index funds are traded on the stock market like shares ASX EFT fact sheet

    Lower MER than vanguard, The only downside I can see is you have to pay broker commission everytime you want to buy more. Any other catch apart from that?

    EDITOR: The cheapest share broker Netwealth has told me :

    Dear Mr Bhatt,
    Thank you for contacting Netwealth Sharetrading.
    Unfortunately we do not have the facilities to enable trading in ETF’s at this stage.

    So you’d have to use a more expensive online broker and pay closer to $30/trade than $20.

    That’s the main downside, also having to pay brokerage each time you buy or sell units is like having Entrance and Exit fees, so for smalltime investers I don’t think Exchange Traded Funds (ETF’s) are worth it, and this is why:

    eg:
    You buy $5000 worth of units, pay $30 for brokerage = equivalent of 0.6% Entry fee

    Later on if you sold $5000 worth of units, paid $30 for brokerage = equivalent of 0.6% Exit fee

    When you add the ongoing management fees eg: for the Statestreet streetTRACKS 200 Fund 0.286%p.a. (as at Nov 13 2006), it’s clear that for smalltime investers ETF’s are not worth it compared to the Vanguard index funds.

    ETF’s are great for rich people and those who never plan to sell for many years eg: the Statestreet salesperson I talked to mentioned clients like doctors, lawyers etc who have retired and have a large lump sum to invest and they want a cheap index solution without having to buy/sell individual shares themselves.

  7. Top 200 shares by BankWest is an affordable index fund that follows S&P ASX 200. The fees are low, however not as low as Vanguard.

    Did I read the StreetTRACKS 200 PDS correct in that the application fee is $5000?

    EDITOR: I fail to see why anyone would signup for the “Top 200 shares by BankWest” fund when it does the same thing vanguard does, but it charges almost 0.25% more in fees

    You made a slight mistake, the $5000 application fee mentioned in the StreetTRACKS 200 PDS applies to people who want to buy wholesale units in the fund and retail resell them to other investors

  8. For international exposure to my share investments I am considering an international index fund. What are the pros and cons of investing in an international index fund from Vanguard here as compared to buying shares in an index fund on the Dow (something like investing in STREETTRACKS 200FUND ETF UNITS here in Australia for the ASX)? What are the tax implications?

    EDITOR: the best thing to do to download the PDS (Product Disclosure Statement) for the Vanguard Index International Shares Fund and any similar products and see how they fit your needs

    On a general basis, international investments have all the risks of local investments as well as adding foreign currency risk and they won’t give you the generous franking credits you can get from Australian share investments.

  9. Good write up on indexing, but it is not completely balanced.

    Active managers do have their benefits in that they add another level of diversification. I would not say that either active or passive (index) are better than one another, I would say that combined they are better than the sum of their parts.

    Portfolio theory suggests that you should have a core portfolio exposed to main index (eg MSCI) and satellite funds/stocks that are separate from the index and will attempt to add value.

    Index funds are perfect to gain exposure cheaply and effetely to the MSCI (Vanguard International), where an index fund can not attempt to out perform the index, as it is against the nature of the fund!

    I must stress I am not saying that the active managers will add value every year, but they will add diversification every year and that is very beneficial in lowering your risk. Look at what the Vanguard International (un-hedged) did over the past few years, it was very flat. Look at what Platinum did over the same time, it out performed significantly, but recently, the Vanguard has out performed Platinum. If you had of had exposure to both, your overall portfolio would of not been exposed to the highs and lows of the individual funds.

    When I say active managers, I mean proper non-index hugging funds. Many of the main name active funds will just mimic the index only changing a few stocks, so that they minimise the possibility of them performing significantly lower than the index, as this really hurts the level on additional investors that they will receive. These funds have no place in your portfolio, as they are more expensive than an index fund and will never significantly out perform it.

    And before I go, just a quick note on the adviser bashing. If you know what you want, then advisers are getting money for jam, but if you don’t know everything, then there is scope for the adviser to add value. A lot of people will say they have money to invest, but don’t know what to do. By offering a diversified portfolio (including index funds!) that is appropriate to the clients needs, it is easy to add value above what is charged in fees (after trails have been rebated, so the advice is un-biased). But this is not an add for planers, so I shall stop there. If you cant tell, I am an adviser.

    EDITOR: Regarding commissioned planners the reason I don’t like them on principle is that a significant number make recommendations based on hidden kickbacks and commissions. If you rebate all these to your clients than I have no problem with your practices

    To see what I mean read the article quoted below: AMP caught out by regulators (ABC PM program):

    The financial services giant AMP is facing embarrassing revelations today [27 July 2006].

    The Australian Securities and Investments Commission has found that AMP’s network of financial planners used flawed advice to lure people into switching super funds, so the company could make profits, and the planners could make fat commissions.

    After entering a court-enforceable undertaking with the watchdog, AMP is being forced to restate advice to up to 7,000 customers. There may be compensation involved.

    Consumer advocates say it’s symptomatic of widespread problems with the industry, whereby commissions paid to middle men can corrupt their advice.

  10. Hi,

    Interesting information on this site – thanks for making it available.

    Does anyone know who are the main Index fund providers (where I can go direct such as via e*trade)in Australia? I can only find Vanguard, but there seems to be Barclays but they appear to be only available through a masterfund or wrap facility.

    EDITOR: As far as I know the only true direct index fund provider for the average person with less than several $100,000 to invest is Vanguard. All the others are wrap products eg: “Top 200 shares by BankWest” or require quite large initial investments eg: $500,000 or $1,000,000

  11. “If you’re thinking of taking refuge in managed funds, then aside from the tax issue, there’s also the question of whether actively managed funds or index funds are better. There’s some debate about this, but, in general, most active funds do no better than an index fund, despite charging higher fees.

    Last year nearly two-thirds of Australian shares fund managers failed to beat the S&P/ASX300 index”

    – from article: “Many Unhappy Returns” – Sun Herald 18/03/2007

  12. Suppose you do have more than $500,000 to invest, which managers are available? From previous comments it appears that Vanguard are best known, but that AMP, Bankwest, Barclays, Macquarie and State Street Global. Has anyone done a comparison? In theory results should be nearly identical, so are costs the only issue?

    EDITOR: With that much money just for investment purposes pretty much any bank or investment company will be falling over to offer you their services!

    Costs are not the only issue, consider their past record of customer service (or lack of) and whether they fit your risk profile eg: putting your money in a hedge fund would be a high risk choice for a possible high return

  13. Over one year, investors paid fund managers handsomely to underperform the index. They can’t beat the index, they can’t stop trading and worse still, they can’t stop flooding retail investors with unwanted tax bills. Australia’s biggest fund managers might have a higher profile but a new Eureka Report survey shows the household names of Australian managed funds sector are the worst performers in the market.

    Excerprt from “Big-name funds disappoint” By Scott Francis – eurekareport.com.au

  14. How about exchange traded index funds? StreetTracks seem to be the only operator here in Australia and the MER is very low (under 0.286% see above #6 )

    Getting tricky there are plenty of warrants available on these, which could be interesting.

    However on the brokerage question : assume $5,000 invested and $30 brokerage :

    ETF costs for 3 years (.286 * 3) + (.6 * 2) = 2.058 %
    Vanguard for 3 years (.750 * 3) + ( 0 ) = 2.250 %

    Looks good for the ETF if you exit at only three years. The downside is that topping up would become quite expensive. Have I missed something? The ETF is looking a clear winner – and you can get in for $500 presumably since they’re traded on the exchange. Of course the brokerage would kill you at that small a starting stake…

    We’ll need to spreadsheet this for some scenarios I think.

    EDITOR: hi Matthew

    My thoughts on ETF’s are in comment #6. Personally I don’t use them because I usually invest in small amounts regularly so the brokerage costs would be too high for me

  15. Thanks guys i got heaps out of this page, only took me 2 minutes to find and told me everything i was looking for. Just remember index funds are a bottom shelf fund that you buy and don’t think about again they don’t do and arn’t sposed to do special things. But if Ben Gram, Warren Buff and Peter Lynch recommend them then that’s all advice i need.

    EDITOR: Glad to hear my site helped you out Brendan

  16. How does the tax situation with index funds compare with holding shares directly? If I use a dividend reinvestment plan for fully franked shares I don’t get hit with a tax bill at the end of the year. Are index funds still a good buy for people in the top tax bracket?

    EDITOR: Good question phil

    There are possible tax advantages because index funds usually have less turnover than actively managed share funds and therefore typically this means they generate a higher proportion of their return as long-term capital gains whereas an active fund manager might generate a higher return through trading, but leave investors with a hefty tax bill on their annual distribution.

    Check with your financial planner or accountant for more details

  17. My financial planner is retiring and has someone taking over his one man firm. They are in the transition stage and want me to come to meet the new planner. I want to get out of this meeting and do not want to deal with this firm any longer. They are putting the pressure on me to come and meet the new take-over man, probably to sign a whole bunch of new papers. Help! Is now a good time to get out and if so what sort of penalities will I have to face?

  18. Hi Neerav,

    Are there any other index fund managers in the australian market other than vanguard?

    EDITOR: please see comments #3 and #7

  19. i am thinking of investing in an index fund.What would be the average percentage gain per annum on an index fund with say an investment of $20,000 left in place for 5 years?
    thanks Linda

    EDITOR: Index share funds are inherently risky over the short to medium term compared to cash investments and may fall in value if the overall market falls.

    Also there is no such thing as an average return for index funds over 5 years because I could give you wildly differing results depending on which 5 year period you choose

    Over the very long term 10-20 years+ it is said that share based investments average around 7-8% but this could still be made up of some years in the low single digits and some years eg: 15-20%.

  20. This is an awesome blog, thanks man!
    I also recommend reading ‘Little Book of Common Sense Investing’ by John Bogle
    Cheers,
    Cong

    EDITOR: Good advice Cong

    You can purchase a copy of the Little Book of Common Sense Investing at Seekbooks

  21. I am all about some index funds. I put my whole retirement fund into an S&P 500 fund. I like them cause their fees are so cheap. They usually get a prety good return too. Its too bad that the market is tanking over here in the US. Good thing I pulled my money out a few months ago.

    EDITOR: Hi David

    Where have you kept your money now that US bank interest rates are so low and the US share market is falling?

  22. Hi, I am interested in the Vanguard Index funds, I am retired and am considering investing my SMSF savings 65% in the retail Australian fund and 35% in the property fund to achieve the income I require. I am however concerned about the risk of putting all my money with one company. What are your thoughts on Vanguard? do they have a S&P credit rating? as we know other large organisations have lost lots of their investors money in the recent turmoil.
    Thanks
    Tony

    EDITOR: That’s a good question Tony

    It’s true that many large investment banks and funds have lost lots of their investors money in the recent turmoil, the reasons were many but come down to 2 reasons in my opinion:

    1. Greed in trying to generate as much in fees as possible from their customers – In comparison Vanguard Australia management costs are around half the industry median. (Source: Standard & Poor’s Research as at February 2006)

    2. Taking huge risks and investing in speculative companies because of their belief that actively managed funds can “beat the index rate of return” – Index managers like Vanguard, don’t try to outperform the market.

    Rather, they invest in all or a representative sample of the securities in the index and let markets do their work over the long term. By adopting a ‘buy and hold’ approach the cost of investing can be significantly reduced over time and lead to better returns for investors in the long term, especially on an after-tax basis. Because index funds invest in all or most of the securities in an index, they provide diversification, which means lower risk.

    I can’t give you specific advice about your asset allocations but I can point you to a quote: Motley Fool: “Psst. There’s a reason that all these magazines don’t tell you how simple mutual fund investing really is. Scientific marketing surveys and focus group testing have determined that magazines with covers that read “Index Funds: Still The Best Choice!!!” every single month really wouldn’t sell as well as magazines that promise “Our BRAND NEW 10 Best Mutual Funds To Buy RIGHT NOW!” Sad, but true”

  23. Why it’s so hard to “beat the street”, By Alan Kohler

    PORTFOLIO POINT: Given that most fund managers cannot beat the market in the long term, Burton Malkiel urges individuals to have indexing for at least the core of their portfolio.

    Burton Malkiel’s ground-breaking bestseller A Random Walk Down Wall Street continues to attract interest and debate well into its ninth edition.

    Widely regarded as one of the best investment books of all time, its thesis is that most stockmarkets are effectively efficient and that picking stocks – whether using fundamentals-based methodologies or technical analysis – is a fool’s game. Random Walk takes a look at fund managers who actively trade and shows that the vast majority of them fail to beat the market in the long term.

    With a Harvard MBA and a doctorate from Princeton, these days Malkiel sits on the board of index fund manager Vanguard Investments and has worked as a Wall Street investment banker and an academic economist.

    He is a leading proponent of passive index fund strategies for personal investors and has most recently published From Wall Street to the Great Wall: How Investors Can Profit from China’s Booming Economy.
    – source: Why it’s so hard to “beat the street”, By Alan Kohler

  24. This is a great (and long running!) thread. I’m a long-time Vanguard fan (since the early 90s in the US), but I have to say that I am fairly unimpressed with their MER in Australia. Their equivalent US S&P 500 has an MER of .15% vs .75% for the ASX 200 (though this goes down for larger amounts).

    Also I am just learning about the buy/sell spread. According to the Vanguard web site, this amounts to a .2% Entry fee and a .1% Exit fee. Do you know whether there is a related issue on ETFs or do they only have brokerage fees?

    According to InfoChoice there is now a broker called “Interactive Brokers” who can process trades of up to $7500 for $6, and .08% after that. http://www.infochoice.com.au/Home/Investment/OnlineBrokers/Compare/tabid/265/Default.aspx,

    This, along with the .3% buy/sell spread changes the comparison in comment #17 to the following:

    ETF costs for 3 years (.286 * 3) + (.12 * 2) = 1.098 %
    Vanguard for 3 years (.750 * 3) + ( .3 * 1 ) = 2.5 %

    Am I missing anything in my equations? If not, things for me are leaning pretty heavily towards the ETFs for my investments. It’s even better if I get around to moving to a self-managed super fund, where the long holding period makes annual fees much more important than transaction fees.

    Finally, I have noticed that iShares offer an S&P 500 for a MER of .09%! However this is exposed to currency risk, so I would only put a portion towards that, though it would lower the average MER.

  25. Hi, and thanks for such excellent info; all in the one place.

    I’m considering entering the Index Fund area through the agencies of Storm Financial. While impressed with their approach, I am not entirely sure, and wondered if anyone had had dealings with them… Many thanks. Chris

  26. I’m not familiar with Storm Financial, but looking at some of their product disclosure statements, they have contribution fees of 6.6%+ !

    https://secure.sforce.net.au/research_storm_pdss.php

    This is an incredible ripoff, which should be avoided at all cost. Their annual management fees of 1.14%+ are less extortionate, but still higher than you can get elsewhere.

    If you are after index fund performance, the only ones I have seen worth considering are Vanguard’s managed funds, or the ETFs available from StateStreet (SPDRs tracking Australian shares) or BGI (iShares tracking international shares)

    -Bruce

    EDITOR: thanks for the tip bruce

  27. Chris, you’ve asked about Storm. I had several meetings with them and found them to be very professional and very informative. In fact, I thought they were everything I was looking for. However, I’ve done an awful lot of research and I’ve come to the conclusion that they are VERY expensive. Their fees are actually more than 6.6%, they’re actually around 8% (and that’s straight from the horse’s mouth). Even though the Product Disclosure Statement says 6.6%. Anyway, the bottom line is that I personally didn’t see the need to spend all that money on fees. After all, they’re only offering an index (3 indices in my case). They say that their fees are for professional advice that you can call upon at any time during your investment with them. So really, you’re paying for financial advice. In the long run, in my opinion, you would be better off paying a Financial Advisor an hourly rate for WHEN you actually need the advice instead of paying for it with every single dollar you invest, which would be the case with Storm. Do the maths, and see how much you would have to pay in fees. And don’t forget that the fees you pay never get a chance to grow and compound over the years. So fees of say $50,000 cost you a lot more than that over 20 odd years. That’s my opinion on Storm.

  28. Many thanks Bruce, that was the feeling I was getting, and I’m now starting to do my homework a bit more thoroughly than I used. Cheers Chris..

  29. I have just been reading this site with much interest. I too am in talks with Storm regarding investing in the index funds. It is quite clear, and Storm ‘make no apologies for being the most expensive’ in the industry……but is there really other options for people like myself who really don’t have much idea at all about investing…except knowing that I want to do it, and soon !! Index Funds seems to match our risk profile more than direct shares…and we are interested in med-long term growth… Also – Storm will organise everything for us, including the investment/margin loans (at rates approx. 2% less than normal)
    Thanks, Nicki

    EDITOR: I can’t give personal advice but their fees look high to me and defeat the purpose of an index fund which is to have really low fees

    I suggest calling Vanguard, asking for their PDS (brochure with details of their index funds) and deciding what to do yourself

  30. Hi guys, I’m considering to put my money in an index fund. Right now, I’m considering ‘Vanguard Index Australian Shares Fund’.

    However, when I look at the fact sheet, the fund return before fees and expense are as follows:
    Since Inception (pa) +7.49%
    7 years (pa) +4.71%
    5 years (pa) +6.05%
    3 years (pa) -6.51%
    1 year(pa) -34.42%

    I thought that is really small return compare to what you can get in a bank account last year of 8%..

    However, with the strategy of putting aside money in this fund for 7 years, I don’t think I can make that much money in index fund?

  31. The ETF may well be cheaper in management fees (28bps v 75bps) – but if you are thinking about regularly investing, particularly smaller amounts each week/fortnight – the brokerage will bite hard. ETFs are great for lump sums investing or more infrequent contributions.

    EDITOR: Exactly – your advice is spot on Mike

  32. To “Newbie” in comment 36, because the Vanguard fund just invests in the companies in the ASX 300, what these results are tracking is really the performance of the Australian share market. Vanguard does not attempt to beat the market, but attempts to *be* the market. You should see very similar results for other index tracking funds such as State Street. So your decision should not be based on Vanguard’s performance, but on your expectations of the Australian share market’s performance versus alternatives (such as online savings accounts and actively managed funds.)

    To Tom Smith, Vanguard manages US$1.3 trillion in investments, 100% of which is in highly diversified index funds and fixed income. They do not operate to make a profit, but are owned by their customers. I would imagine that they are about the most stable possible company to invest in.

    However, as much as I respect Vanguard, I invest with State Street due to the lower management fees as per comment 28. It is disappointing that the management fees are 5 times higher than they are in the US (.15% vs .75%). Though as others have pointed out, if you intend to make many transactions and/or are investing for a shorter period of time, Vanguard could end up cheaper.

    -Bruce

  33. I was jut wondering if index funds pay dividends to you directly and if you can allocate them to be reinvested back into the fund thanking you in advance also thankyou for this website EXELLENT

    EDITOR: Yes to both your questions

    glad I could help 🙂

  34. I would like to invest money in an internally geared Australian equity fund which is an index (passive) manager, preferably in a fund with a reasonably high minimum initial investment (say $50,000) to keep the fees as low as possible. I am aware of several internally geared actively managed Australian equity funds, but I can’t find any fund with the characteristics I noted. Any suggestions?

  35. hello again just wondering how safe your money is if you do put a lump sum in an index fund such as any of vanguards as theirs is the only index fund that I know of. Also same question about etf products of which I can find many could any of these large companies go belly up and lose everybody’s money or are there safeguards in place for the investors that own the shares thankyou

  36. why no answer to comment/question 43 thankyou

    EDITOR: The “safety” of investing in shares through another company eg: a Vanguard Index fund or a Statestreet ETF depends on that company’s management and risk procedures at the time.

    I doubt either will go bankrupt any time soon but no one can predict the future

  37. Responding to post 42

    Paul I don’t know of a leveraged passive fund like you describe. This may be simply because an investor can more easily create the same leverage with a margin loan over an index fund. In this way, the investor can determine precisely what level of gearing he or she is looking for, including possible tax deductions.

    Internally geared active funds may be there to meet some super fund requirements, but you didn’t mention if this was important to your search.

  38. I like this idea of index fund as it is so transparent, with low fees and easily monitored.

    Can someone clarify how it works for someone new to investment? If I invest $10,000 for a year and the index went up 8%. What is my returns?
    I expect Returns = Amount invested + 8% – 0.75% management fees + dividends,
    which is Returns = $10,000 + $800 – $75 + dividends paid out.

    Is this unknown dividends part of the equation? With superannuation, you simply see a net figure.

  39. Would buying ASX shares be like investing in an index fund, as volume and market level are related to a certain extent?

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