Elizabeth Kerr is super excited about the NZX providing Kiwis access to international ETFs for their Money Machines

By Elizabeth Kerr

Welcome back everyone. I had a nice warm and fuzzy column all lined up to get you refocused on your financial vision…but we can do warm and fuzzies together anytime.

Instead this week I want to talk about Smartshares and the NZX again.

If you’ve been hiding under a rock for the past week make sure you read today’s’ column to the end because shit just got real!!!

No longer are we New Zealanders forced to invest our money machines in our own backyard, with a side helping of shares from Australian companies; we can aim for world domination for our dollars, because last week the NZX announced the introduction of 9 new INTERNATIONAL Exchange Traded Funds (ETFs).

That’s right, the NZX has partnered with Vanguard in America so we can get exposure to companies all over the world in a way the average New Zealand investor hasn’t been able to do so easily before.  

Lets talk Vanguard

If you haven’t heard of Vanguard before then this is what you need to know. Jack Boggle, an insanely smart guy, figured out that to be a successful investor and make lots of money one doesn’t need to beat the market and get the best returns, one just needs to participate IN the market and the money will come – ie you don’t need to choose the winning horse in a race every time; you can just routinely bet a little on them all in each race and you will make some guaranteed money that way instead.  

To add to his idea he looked around and saw the fund managers, even with their shiny shoes and expensive educations, couldn’t accurately pick the winning companies to invest in often enough over the long term to make all their clients wealthy, but were happy to keep charging them huge fees to keep trying.

So, Jack devised a low fee way of investing by using an index which gave average returns, but and here’s the clincher…did so consistently all the time, meaning the investor made just as much money over the long term. It is this theory which makes up the basis for the Smartshares products which I have written about before here and here.

The other really important thing to note is that no one really owns Vanguard per se. It exists solely as a vehicle for its investors to invest in these company indexes therefore can afford to keep the fees low as there are no profits required to prop up the company xmas party or payout performance bonuses to their staff.  

How does it work?

If you’re interested and you haven’t already got a Smartshares account with the NZX then go online and click on Invest Now. There are already 10 Smartshares products to choose from within NZ and Australia. The additional nine international ones (to be available July 29) are listed in the table at the end of my column.  

All you need to do is fill out the paperwork, invest an upfront $500 and a minimum $50 at least every time after that, and the NZX will go and invest it in the underlying Vanguard ETF fund of your choice from the nine offered. Your return will essentially mimic the same returns Vanguard gives all it’s investors in those funds, less NZX fees and tax of course

As you can see I’ve taken a few liberties and included some extra information in my table for you. Don’t blow an artery if I’ve got it wrong, you need to do your own due-diligence first of course, but I thought you’d be interested to know what the average returns over the last 5-15 years have been for some of these funds and what would be in your bank account if you’d invested US$10,000 with them at the time these funds were started. The first and most obvious is that all the funds have increased the initial deposit.  But if you look at the actual graphs on the Vanguard website you can see there were some shaky times, and your knuckles might have turned white from holding yourself back from withdrawing your funds in fear.   

Why Vanguard? Why didn’t the NZX just do it themselves?

Basically it comes down to scale. NZ is but a pimple on the globe and doesn’t have the money, or investor population to justify all of the work required to go and invest in 500 US based companies AND only charge a teeny tiny fee for the privilege. It just makes sense for the NZX to partner with someone who is already doing it well.

Why not just go direct to Vanguard yourself?

I have been reading the forums this week and I know some of you are still disappointed the fees aren’t as cheap as in the US and that you think you could save more money by investing directly through investment brokers in the US, and sending money via cheap foreign exchange vehicles. And yes, you could probably do that some of the time… but for the most part the power of these products is that it makes international investing accessible, cheap and easy for the average NZer putting away their loose change for an early retirement, and there is no faffing about with foreign exchange rates as that’s all taken care of for you.  Other things to note are:

  • If you were to go direct you would need a minimum of US$3000 to start your account, whereas with the NZX you just need the minimum NZ$500 and NZ$50 per deposit thereafter. Whoop whoop!
  • You can call the NZX for support and not need to be awake in the middle of the night trying to get hold of someone in America to answer your questions.
  • The dividends are paid out to you in $NZ.
  • AND (this is important!) you have the option of reinvesting your dividends back into the fund again if you want to.
  • No foreign exchange process that needs managing by you and a third party.
  • As with all Smartshares products, it’s all automatically and impartially invested according to a companies weighting within an index.  

What are the fees then?

The very first time you make an investment into one of these international Smartshares products you will need to pay an Application Fee. This will be $30 for amounts less than NZ$20K or 0.2% for amounts over NZ$20k. This is a one-off fee. If you are intending to keep investing in your chosen fund at all thereafter you don’t have to pay it again.

The fee by the NZX for managing these funds for you is 0.30% for the US 500 Trust (USF) and 0.45% for the 8 others.  

Who likes PIEs?

No I’m not talking pastry and mince I’m talking Portfolio Investment Entity.   This means that the funds will be taxed at 28% flat. No questions asked.

What happens from here?

Well the Financial Markets Authority (FMA) has to give these new Smartshares products their big fat tick…and then it’s open for your business from tomorrow hopefully.

In closing

I’m coming dangerously close to endorsing a product here, but I’ll stop short by repeating the power of these funds is in the accessibility for average NZers who want their money to swim with bigger fish, but don’t have the time, inclination or aptitude to figure out how to do it all themselves. If you’re thinking of giving it a go – which fund would you choose?

Smartshares ETF Name

What & Where

Fees

Fund Performance

1. US 500 Trust (USF)

Invests in Vanguard’s S&P 500 ETF, which aims to track 500 large securities listed on the NYSE or NASDAQ markets. (VOO)

 

Vanguard Fee:0.05%

 

NZD Fee: 0.30%

$10,000 USD in June 2010 would be $20,888.83USD today. 

 

An average return of 16.55% per year.  (no data earlier than 2010)

2. Europe Trust (EUF)

Invests in Vanguard’s FTSE Europe ETF, which aims to track securities in developed European markets including Germany, Switzerland and the UK.

(VGK)

 

Vanguard Fee:0.12%

 

NZD Fee: 0.45%

$10,000 USD in June 2005 would be approx $17,440USD today.

 

An average return of 4.70% per year.

3. Asia Pacific Trust (APA)

Invests in Vanguard’s FTSE Pacific ETF, which aims to track securities in developed Asia Pacific markets, including Japan, Singapore and Australia.

(VPL)

 

Vanguard Fee:0.12%

 

NZD Fee: 0.45%

An average return of 5.34% per year over the last 10 years.  

 

$10,000 USD in 2005 turned into $16,817USD today.

4. Emerging Markets Trust (EMF)

Invests in Vanguard’s FTSE Emerging Markets ETF, which aims to track securities from emerging markets including Brazil, China, and India.

(VWO)

 

Vanguard Fee:0.15%

 

NZD Fee: 0.45%

$10,000 USD in June 2005 would be approx $21,494USD today. 

 

7.36% average per year.

5. Total World Trust (TWF)

(VT)

Seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets.

Has high potential for growth, but also high risk; share value may swing up and down more than U.S. or international stock funds.

Only appropriate for long-term goals

Vanguard Fee:0.17%

 

NZD Fee: 0.45%

$10,000USD in 2008 will have turned into $14,365 or 5.3% average return per year..

6. US Large Value Trust (USV)

(VTV)

Seeks to track the performance of the CRSP US Large Cap Value Index, which measures the investment return of large-capitalization value stocks.  Provides a convenient way to match the performance of many of the nation’s largest value stocks.

 

Vanguard Fee:0.09%

 

NZD Fee: 0.45%

$10,000USD in 2004 would be $19,950USD today representing an average return of 7.36% per year since inception.

7. US Large Growth Trust (USG)

(VUG)

Seeks to track the performance of the CRSP US Large Cap Growth Index.

Vanguard Fee:0.09%

 

NZD Fee: 0.45

$10,000 USD in 2004 would be $23,980USD today.  An average return of 8.06% per year.

8. US Mid-Cap Trust (USM)

(VO)

Seeks to track the performance of the CRSP US Mid Cap Index, which measures the investment return of mid-capitalization stocks.

Provides a convenient way to match the performance of a diversified group of medium-size companies.

Vanguard Fee:0.09%

 

NZD Fee: 0.45%

$10,000 USD in 2004 would be $24,475 USD today.  An average of 9.67% since inception.

9. US Small-Cap Trust (USS)

(VB)

Seeks to track the performance of the CRSP US Small Cap Index, which measures the investment return of small-capitalization stocks.

Provides a convenient way to match the performance of a diversified group of small companies

 

Vanguard Fee:0.09%

 

NZD Fee: 0.45%

$10,000 USD invested in 2004 would be $24,762USD today or 9.42% since inception.

 

 

 

*** use the codes in brackets and bold text – for example (VB) as immediately above – on the Vanguard.com website to see the Smartshares underlying Vanguard fund performance.  It’s really quite interesting and you can compare different funds performance against each other.