I am confused about the difference between an index fund, and an ETF. Can someone please explain the difference? I have googled, read many articles and watched various podcasts including some by Jack Bogle, but I still can’t get my head around it.
For example, I hold Smartshares USF500 - according to Sharesies:
“US 500 fund invests in the Vanguard S&P 500 ETF which is an index fund.”
So what is the difference between that and say, AMP Global Shares Index Fund?
Index fund v ETF
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09-10-2019, 01:33 PMjustakiwiIndex fund v ETF
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09-10-2019, 01:56 PMstoplossFrom investopediaQuote:
Originally Posted by justakiwi
An index fund is a portfolio of stocks or bonds that is designed to mimic the performance of a market index. These funds frequently make up the core holdings of retirement portfolios and offer lower expense ratios than actively managed funds.
An exchange-traded fund (ETF) is a basket of securities that tracks an underlying index. ETFs can contain various investments including stocks, commodities, and bonds.
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09-10-2019, 01:57 PMJoshuatree
ETF is a (stock) Exchange Traded Fund.It can be an index ETF or whatever you want there are so many out there eg A tech company ETF, a Utility ETF, a London companies fund etc etc.
An index fund is just that , it covers only the index of choice but it may not be exchange traded eg it could be an internally managed unit trust although i think these are going out due to too high fees, liquidity etc. ETFs have low management fees and Index ETF's the lowest fees for obvious reasons. -
09-10-2019, 01:58 PMblackcapI think it is just dealing in semantics. An ETF is an "Exchange Traded" Fund. So you can buy and sell units or shares on an exchange. There are plenty of funds out there that you cannot trade on an exchange. You apply for units, send the fund cash and they allocate units to you. If you wish to sell you "redeem" your units by informing the fund and they pay you your money out.Quote:
Originally Posted by justakiwi
With an ETF if you want to "redeem" you just inform your broker and they do the trade on market.
As for the index bit. Some funds are index funds (ie follow an index), others are not. Either can be ETF's
That is the simple explanation. -
09-10-2019, 02:31 PMjustakiwi
Thanks people. That made things a bit clearer :t_up:
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09-10-2019, 10:26 PMSBQ
All replies are not really that clear. No mention of the internal operations of 'index funds'.
An ETF is just a term that the 'fund's shares are bought and sold on the exchange so retail investors can buy & sell the holding/fund in the same manner as buying & selling shares of a individual companies. There are 'mutual/managed funds' and there are 'index funds' for which ALL can be classed as ETFs because their shares are bought and sold in the same manner as buying shares on the stock exchange.
Now, "Index Funds" are more specific in the area of 'managed funds'. While they may be touted as being 'unmanaged' or having a passive investment approach, the clear difference is in their operation and differ to advertised "Actively Managed" funds where investors give their $ to the fund managers; then they take it to invest in 'what they hope' will provide the best return for their clients. Such actively managed funds claim to spend vast amounts of time and research to hunt down the right stocks to buy so they can 'SELECTIVELY' pick stocks to buy or sell on certain news or insider info, etc.. or what spin they tell their clients blah blah. Index Funds are done entirely different without this emphasis and coins the term 'passive' investment because they do nothing but proxy the return of a certain sector / industry / commodities or major market benchmarks such as your S&P500. There is no hand picking of when to buy or sell companies that we see with actively managed funds. In the case for the S&P500 index, an ETF that mimics this index will have low management fees because they only do what for eg what changes goes on in the S&P500 index and has no incentive to waste time on flight travels, visiting corporates, finding inside information, etc. that we see with most actively managed funds researching their stock picks.
Prior to 1960 (if I recall correctly), the only way a person could get the performance of the S&P500 was to purchase all 500 listed companies. A problematic task for the individual investor as share prices vary between all 500 companies so the investor would need to track the value of all 500 companies in order to maintain a proper, evenly weight distribution ownership. Then there's the divisiabilty problem where small amounts could not purchase all 500 companies evenly (ie if 1 stock was over $500/share, there would be no way a person with $100 could buy it because there's no such thing as buying a 1/4 of a share). Nowadays, with an Index Fund ETF (note how I add ETF), these problems are no more so, no matter if a person contributed $50/month or $5000/month, the index ETF would handle the management of the sums (as the fund pools the cash funds to get around the small divisability problem). Furthermore the index ETF would do proper rebalancing of the shares and keep track when the S&P500 adds a new company on the list and kicks off the other. Generally during this process the company being added to the list gets a temporary boost in share price while the company that gets off the S&P500 suffers more on it's share price.
So to clarify, an ETF is nothing more than a bunch of managed funds (you can say companies) where it's shares are open to the retail public to buy and sell. An Index Fund is nothing more than an ETF (or you can say a TYPE of company) where it's shares are open to the retail public to buy and sell directly.
I have a problem with companies like Sharesies because what they're doing is basically skimming NZ investors that want to buy their S&P500 fund since all they are doing is buying the Vanguard S&P500 Index ETF. Sharesies will get charged a managed fee by Vanguard and Sharesies will add their cut on top of that to the NZ investor. So why doesn't the NZ investor buy the Vanguard index fund directly? Because in NZ we have this stupid regulation called the FMA and also, issues around the FIF taxing of foreign investments (on account balances over $50K value). Yes it could be argued that Sharesies may handle the FDR 5% rate for clients buying their USF500 fund but I haven't seen the details on how they're addressing FIF for each client and how they assess resident witholding taxes. -
11-10-2019, 07:05 AMblackcapYou should really say you have a problem with Smartshares as they are skimming off Vanguard. Sharesies offer the Smartshare range and do not take a cut on top of the Smartshare product. Smartshares give them a rebate but that comes from Smartshares not Sharesies.Quote:
Originally Posted by SBQ
One really interesting thing with Sharesies now that you can buy fractional shares is that it actually will be possible to replicate an index fund (in NZ at present) at pretty much zero cost. I might start on a spreadsheet and replicate the NZ 50 and see how that goes. -
15-10-2019, 01:17 PMSBQThey're all doing it! Average Vanguard mgt fees are around 0.1% - and it's not really interesting to see how NZ funds offering what?, around 500-5000% more to NZ investors to buy the same index ETF? For what? Because all the managing NZ funds are doing is having a US broker holding their account in NZ trust name and buy the Vanguard ETF? For which the trend but most US brokers is commission FREE trading. So how do NZ funds justify the high management fee to buy the same index ETF? Perhaps more paper compliance with the NZ FIF tax rules? That' can't justify such a high management fee.Quote:
Originally Posted by blackcap
and here's a video interview of John Bogle, founder of the Vanguard Group:
https://www.youtube.com/watch?v=n_bPmNUT0XA
To give you an idea how clueless NZ investors are (and all that TV advertising i'm seeing that 'managed funds' are good), Mr Bogle clearly states in the interview @ time 3:18 "Buy the Broad Market Indexes... and NOT .... the very narrow.. single market country indexes" (hint hint! like NZ which include the NZ ETFs). But instead, you have NZ tax rules that deter direct foreign investments, and according to the FMA, a ban on derivatives / options futures forex investments abroad for the NZ retail investors. Clearly this is not a fair level playing ground for global investments no matter if you can buy fractional NZX index shares or not. -
18-10-2019, 03:02 PMTronald Dump
"An ETF is just a term that the 'fund's shares are bought and sold on the exchange so retail investors can buy & sell the holding/fund in the same manner as buying & selling shares of a individual companies. There are 'mutual/managed funds' and there are 'index funds' for which ALL can be classed as ETFs because their shares are bought and sold in the same manner as buying shares on the stock exchange."
No, this is not correct. An ETF is simply a managed fund that trades on the stock exchange. This means it has intra-day pricing and liquidity (i.e. it can be bought or sold any time the market is open). Managed funds are typically priced once per day, and some have long notice periods for getting your money back. ETFs can be passive or active, and so can managed funds.
So to clarify, an ETF is nothing more than a bunch of managed funds (you can say companies) where it's shares are open to the retail public to buy and sell. An Index Fund is nothing more than an ETF (or you can say a TYPE of company) where it's shares are open to the retail public to buy and sell directly.
ETFs are NOT 'a bunch of managed funds'. An ETF IS a managed fund that hold assets either directly (e.g. Smartshares NZ50 Fund or Vanguard S&P500 fund) or indirectly (e.g Smartshares US500 fund, which invests via Vanguard). An index fund can be either an ETF or a managed fund.
I have a problem with companies like Sharesies because what they're doing is basically skimming NZ investors that want to buy their S&P500 fund since all they are doing is buying the Vanguard S&P500 Index ETF. Sharesies will get charged a managed fee by Vanguard and Sharesies will add their cut on top of that to the NZ investor. So why doesn't the NZ investor buy the Vanguard index fund directly? Because in NZ we have this stupid regulation called the FMA and also, issues around the FIF taxing of foreign investments (on account balances over $50K value). Yes it could be argued that Sharesies may handle the FDR 5% rate for clients buying their USF500 fund but I haven't seen the details on how they're addressing FIF for each client and how they assess resident witholding taxes.
Why buy Smartshares ETFs rather than going direct to Vanguard? Because it's FAR cheaper. If you put $10,000 into Vanguard's US500 ETF in the US market through Direct Broking or similar, you'll pay:
$60 commission
$90 forex spread (to change the NZD to USD)
0.25% p.a. custody fee
$60 p.a. admin fee
0.03% Vanguard management fee
This adds up to around $240 in year one (or 2.4% of your investment). Then you have 33% tax on dividends (assuming you're a higher rate taxpayer).
If you buy the same fund directly through Smartshares you'll pay:
$30 account set up fee (one off)
0.34% management fee
All other costs (e.g. forex spreads, custody) are included in the management fee.
This adds up to $64 total cost in year one. The Smartshares ETFs are also PIEs so you'll pay 28% tax, and the tax is taken care of for you within the fund.
When you come to sell your Vanguard ETF via Direct Broking, you'll pay another $60 commission, $90 forex spread and a $100 custody release fee. When you sell your Smartshares ETF you'll pay $30 commission. -
18-10-2019, 03:08 PMTronald DumpThe simple fact is that the passive NZ equity funds on offer here have outperformed their active counterparts pretty consistently over the last 1/3/5 years. I suspect most NZ equity investors would have been much better off after costs and taxes investing in a passive fund than in either an active fund or a self-managed portfolio. So not that clueless after all.Quote:
Originally Posted by SBQ
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19-10-2019, 11:11 PMSBQQuote:
Originally Posted by Tronald Dump
You're slicing hairs and won't stand to be corrected. Who cares if the assets are held directly or indirectly, it's still funds or portfolios.
Quote:
What??? Which direct broker are you getting these figures from? Many brokers TDAmeritrade and Charles Schwab offer FREE commission trades and have none of those fees. Better yet, they get you near market exchange rates on foreign currency better than any NZ bank would offer. As a matter of interest, those in Canada & US can exchange currency with nearly no spread using the Norbert Gambit move : https://www.genymoney.ca/norbert-gam...usd-questrade/Quote:
I have a problem with companies like Sharesies because what they're doing is basically skimming NZ investors that want to buy their S&P500 fund since all they are doing is buying the Vanguard S&P500 Index ETF. Sharesies will get charged a managed fee by Vanguard and Sharesies will add their cut on top of that to the NZ investor. So why doesn't the NZ investor buy the Vanguard index fund directly? Because in NZ we have this stupid regulation called the FMA and also, issues around the FIF taxing of foreign investments (on account balances over $50K value). Yes it could be argued that Sharesies may handle the FDR 5% rate for clients buying their USF500 fund but I haven't seen the details on how they're addressing FIF for each client and how they assess resident witholding taxes.
Why buy Smartshares ETFs rather than going direct to Vanguard? Because it's FAR cheaper. If you put $10,000 into Vanguard's US500 ETF in the US market through Direct Broking or similar, you'll pay:
$60 commission
$90 forex spread (to change the NZD to USD)
0.25% p.a. custody fee
$60 p.a. admin fee
0.03% Vanguard management fee
This adds up to around $240 in year one (or 2.4% of your investment). Then you have 33% tax on dividends (assuming you're a higher rate taxpayer).
If you buy the same fund directly through Smartshares you'll pay:
$30 account set up fee (one off)
0.34% management fee
All other costs (e.g. forex spreads, custody) are included in the management fee.
This adds up to $64 total cost in year one. The Smartshares ETFs are also PIEs so you'll pay 28% tax, and the tax is taken care of for you within the fund.
When you come to sell your Vanguard ETF via Direct Broking, you'll pay another $60 commission, $90 forex spread and a $100 custody release fee. When you sell your Smartshares ETF you'll pay $30 commission.
But I have not heard such transaction done for NZD / USD exchanges (mainly because NZ brokers are great at charging fees on everything).
Have a look at the expense ratios here: https://investorjunkie.com/12474/commission-free-etfs/
and they don't show $60 commissions or the extra fees you've mentioned. One thing certain is NZ brokers and managed funds will not have a lower expense ratio than those that can buy direct using a US broker. All thanks to the FMA which recently US brokers have either closed accounts for NZ residents or restrict their trading ability. Certainly, not opening new accounts for NZ residents.
and since we're talking about fees, the biggest theft IMO is NZ's taxing of such overseas funds via the FIF rules. No fund operates in a way where the total balance of the fund would be subjected to a max of 5% (FDR) without considering ANY tax credit on years when the stock market goes down. I can only imagine how unsettled John Bogle would feel if his investors were to be stung with such a fee (or in IRD's view, an annual tax) because at the end of the day, the FIF will simply erode the compound returns of any fund period. I would also ask where is the transparency of Sharesies on the handling of FIF on their S&P500 ETF? Because I can assure you the managing of FIF on their foreign invested ETFs comes at an added cost to the investors vs the one that buys direct with a US broker and managed their own FIF filing.
But who am I kidding? Any person with serious $ would not pick NZ to reside in if they're going on this path of long term investing. In N. America the vast majority invest into ETFs and stocks which grow in a 'deferred TAX FREE compounding' way (or in some cases, in Canada they have 100% tax free investment plans such as RESP (reg. education savings plan) and RDSP (reg. disability savings plan) all on the focus on growth with no tax to pay. It's also very logical on employee matching investment plans that at retirement time, the person would have little or no income and would begin to withdraw their investment in a controlled way to the tax bracket they desire to be taxed in. A senior wanting a new motorhome? Well they just sell a certain portion of their ETF investment (that they invested for many decades) and pay the tax. Not like in NZ where IRD's greedy hands is to tax the NZ funds indiscrinimantly regardless what person's resident tax bracket they're in. Oh.. wait a min.. they've thrown out dog bite with the PIE funds at a top tax of 28% which is a free bee for the top tax bracket income earner... :huh: -
19-10-2019, 11:16 PMSBQThat's nothing new abroad and Warren Buffet for his entire life made the same claim. However, we still see Kiwi Saver Investment Fund ads on FB and on TV putting a silly spin that their 'actively' managed funds are great investments. Where are the ads in NZ that promote non-active / passive index investment funds and their claim that they've done better than 99% of actively managed funds?Quote:
Originally Posted by Tronald Dump
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20-10-2019, 10:05 AMjustakiwi
Simplicity
Quote:
Originally Posted by SBQ