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Investors Favor Vanguard’s Low Costs Index and ETF Funds

Vanguard have come a long way since the 1970s when John C Bogle worked hard to build a financial institution that sells index funds that have ultra low expense ratio. You would have asked if they do not have management fees and expense ratio so low how can they survive?

Well, they happen to manage a huge amount of money so despite having a low expense, they can still get by. Plus the fact that their majority of the portfolio have been passive indexing, they do not have to have too many star managers (although they do have an active fund portion for some time)

I always favor investing in low cost broad country or region exchange traded funds (ETF) over investing in unit trust. The advantages are

  1. Your active unit trust depends on your star manager to beat the index. Most of them do not. There are some that do, but not every year. And the star manager leaves.
  2. A good fund may not survive over the long run
  3. Before you start counting your gains, you already lost big in front loading cost of 1% to 5%, and large expense ratios recurring annually from 1% to 5%. Remember, returns compound, cost do as well. Returns are not definite, costs are.  Take a look at the chart below.

Great for investors who wants low management

I talked to a lot of people who want to grow their money, but they don’t buy my dividend and stock investing crap haha. Its a lot of work they say!

ETFs on the SGX and NYSE

For these folks I would definitely recommend a ETF (not synthetic). ETF functions like a index fund that tracks a particular index but ETFs are traded on stock exchanges like SGX and NYSE.

Thus, even a Singapore investor can buy ETFs in US or Europe.

The ETFs in US tend to have lower annual cost compare to Singapore. Imagine they can have costs as low as 0.06% while for us 0.35% is considered pretty good.

Respectable returns for STI ETF

Andrew Hallam of Millionaire Teacher is another big advocate of this. And he favors you to invest in a broad home country ETF, a world ETF and a bond fund.

In Singapore’s context it will be the STI ETF. I talked about STI ETF and profile its total returns since 2002. Despite being in a big bear its annualized returns is 9% per annum. That’s pretty great. You can check out that report here.

For the world ETF, there is the DBXT MSCI WORLD TRN ETF and the Lyxor ETF MSCI WORLD listed on the SGX. The problem is that they are pretty illiquid.

Vanguard leading ETF inflows in 2012

Now we know that many companies like BlackRok, Powershares and Wisdom Tree are coming up with all sorts of ETFs to track different markets, sectors and strategies.

So why is it in this ETFTrends report, it seems that Vanguard is taking in so much more money?

Year to date through the end of April in the ETF business, Vanguard had gathered $21.6 billion so far in 2012, while BlackRock’s iShares collected $13.3 billion and State Street added $7.2 billion, according to data from the ETF Industry Association.

“Vanguard collected $4.4 billion in April, which was four times more than the next closest provider and nearly twice as much as the rest of the industry combined. The company’s ETF offerings last experienced a monthly outflow in February 2003,” says investment researcher Morningstar.

The difference could be in the ultra low expense ratios. Costs are definite and if u can achieve as close to frictionless u gain advantage.

VTI has an expense ratio of 0.06%, while BND charges 0.1%.

“The core is where you have the majority of assets, and that’s where investors are expecting the lowest-possible-cost products,” said Martha King, managing director of Vanguard’s financial advisory services division, in the article.

“Costs matter more when expected returns are low. If you’re expecting only a 2% or 3% return, a 1% fee seems a lot more expensive,” added Mike Rawson, an ETF analyst at Morningstar.

Any one here does low cost investing in ETFs?

I doubt a lot of people does indexing or manage a passive portfolio. I know one friend does but he trades in and out actively, which is not what I am refering to. If you are doing longer term investing with ETFs do share your experience with us

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eve

Monday 21st of October 2013

Hi,

I know this is an post but I'm new to index investing though I have just started to invest in some stocks for income and dividends. This might seem like a silly question. Would one have a better return if one were to invest in couple of stocks like sph, singpost for dividends while at the same time DCS the STI ETF?

Also, how do I go about buying Vanguard ETF or is there any resources I can go to to know what ETF to DCA from Vanguard? This is only meant for ETF outside Singapore?

Thank you!

Raymond

Saturday 2nd of June 2012

Hi Drizzt, I'm also in favour of Andrew Hallam's method of index investing and am planning to start implementing his method. Initially I'm considering doing it via local unit trusts or via SCB online trading in US ETFs. Chose to opt for the former and will be starting this month (June).

For unit trust, I assume that the absence of currency exchange risks could justify the higher management cost? You mentioned you started from a unit trust background, so would like to know if you have any reason/experience to share for advising me against unit trusts.

Regarding US ETFs, they have very high liquidity and very low expense ratios, but will have to take into account currency exchange risk. This will be my Plan B should the unit trust method not work out.

Invest Apprentice

Friday 1st of June 2012

Hi Drizzt,

At this point of writing, my lot on STI ETF using DCA is down about -3%, as my average cost is $2.9184. The counter is taking a sharp turn downward with the rest of the globe.

Suspending it for the moment while consolidating my cash flow. Meanwhile I just bought some iShares Asia High Yield Bond ETF, right before its ex-date.

My logic is that, if equities are taking a hit, at least some bond holdings can balance off the losses given its yield.

And I'd rather take my chances at a diversified HY bond ETF than a normal bond ETF.:P

momo

Monday 28th of May 2012

Hi, momo from sgfunds here. I for one believe in the boglehead/passive way. I believe it is the best way for me (and many others). Many people who actively manage their portfolios could have been better off if they did it the passive way.

@Createwealth8888 Not info for 4 years, but you can see the total return over other duration here: http://www.spdrs.com.sg/etf/fund/fund_detail_STTF.html

Drizzt

Monday 28th of May 2012

hi momo! thanks for sharing. always great to see folks still sticking to the boglehead way.

Createwealth8888

Sunday 27th of May 2012

Can share with us what is the total return (dividend + capital gain) over 4 yrs for STI ETF?

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