Many long-term investors choose to trade exchange-traded funds when attempting to gain exposure to an index. In addition to having backing from physical shares (or a small portion of them), ETFs are also entitled to dividend payments. As well, other index trading mechanisms such as futures and options, are time sensitive whereas ETFs are not. You cannot lose more than you invest in ETFs – which cannot be said for leveraged instruments such as CFDs and futures which are purchased on margin.
What are three common ETFs? What are the perks and differences of each one?
Three Exchange-Traded Funds for the ASX 200/300
- iShares MSCI Australia 200
- SPDR S&P/ASX 200 Fund
- Vanguard Australian Shares Index ETF (mirrors the ASX 300)
iShares MSCI Australia 200 ETF (IOZ)
This ETF is based on the MSCI Australia 200 index. The underlying index holds the 200 largest securities in the Australian equity universe. It excludes foreign stocks traded on Australian exchanges. The ASX ticker symbol is IOZ. Below are a few facts about the ETF:
- ASX Code: IOZ
- Management costs: 0.19%
- Dividends distributed quarterly
- 200 companies
- Total Net Assets $286 million dollars
SPDR S&P/ASX 200 Fund (STW)
This fund also has the objective or closely matching the returns of the S&P ASX 200 index.
- ASX Code: STW
- Management costs: 0.29%
- Dividends distributed semi-annually
- 203 companies
- Total Net Assets $2.2 billion dollars
- Weighted Average Market Cap $49.5 billion
Vanguard Australian Shares Index ETF (VAS)
The Vanguard Australian Shares Index ETF is based on the S&P/ASX 300 Index, instead of the ASX 200. The goal is to mirror index performance minus management fees.
- ASX Code: VAS
- Management costs: 0.15%
- Dividends distributed quarterly
- 298 companies
- Total Net Assets $200 million dollars
Understanding the Differences
What are the key differences between these funds? There are a few considerations you should make before deciding which product is right for you.
Underlying Index. Do you want to invest in the largest stocks only? Then choosing a fund which is based on the ASX 200 would be most suitable – such as the SPDR and iShares. Do you desire small-cap exposure for additional gain at the expense of increased volatility? Then choosing a fund based on the ASX 300, such as Vanguard, will include 100 small-cap stocks that the ASX 200 does not track.
Management Costs. Management costs eat away at profit. Although the differences seem slight, they can add up over time. If all things are equal, look for the lowest management fee.
NAV. NAV is the Net Asset Value of the fund. While the fund tries to mirror the price of the index, there are times where the exchange-traded fund may be relatively higher or lower than the asset base. If too many people are buying into an ETF, this can drive the market price higher than the combined worth of underlying shares. If too many people sell the ETF, the NAV could be lower than market value.
In this regard compare the NAV of the fund versus the current market price of the fund. While this should not be the sole reason to buy a fund – it will show you whether you are picking up the ETF at a discount or at overvalued prices.
Liquidity. In addition to the market price versus the asset value of the fund, you also need to consider liquidity or how many fund units are being traded daily. If very few shares are trading, there is liable to be a larger spread between the bid and the ask. If a fund is illiquid, buying a large order may drive prices up temporarily – which is referred to as slippage. Larger funds typically have lower fees and higher liquidity, but this is not always the case.
Dividend Payments. Dividends make up a significant portion of share market gains. These funds may have differences in when they pay dividends, but also how they pay them. As an example, the Vanguard fund pays quarterly distributions and has a dividend re-investment plan (DRIP). Automatic re-investment is optional with SPDRs – but is only done twice a year. It is optional with the iShares quarterly distributions.
Before buying a new fund you should ensure that dividends are paid regularly and that an automatic re-investment plan is available if desired instead of being distributed as cash in your account.
Conclusion
Index trading is becoming increasingly popular due to its broad exposure to the market, which means a reduction of individual firm risk. When trading an index ETF you can use market timing techniques, hedging tactics, and short-term strategy. These 3 funds that mirror ASX 200 / 300 indexes are useful tools for investors that want dividends, diversification, and ownership of the underlying asset without time decay.