Buying NZ top 50 and All Ords

[arcticblue]

Is there any way of buying the NZX50 and ASX All Ords? I'd like to buy an index rather than shares in each company. The only thing I've found so far are the ETF from Smart Shares and these seem to charge a management fee more like a fund than a share. Is smart shares the only place that does an index?

Also is buying an ETF like FNZ the same as buying a share? Do I buy shares someone is selling or are new shares created when I buy and then destroyed when I sell? I'm unsure if I can always sell out at the current price or if I can only sell if there are willing buyers.

Finally it's a bit unclear on how the dividend works, I presume I get a dividend based on the dividends paid out by the individual companies that make up the index. I can't seem to find out if it is actually paid out or if it is capitalized into the share price.

Are there any other things to look out for when buying an ETF compared with a normal share?

[RRR]

Smartshares is the only ETF in NZ unfortunately. Management fees 0.75%/annum(high for ETF). They also have Ozzie funds.

2 ways to buy -
A. Invest an amount every month or as a lump sum and smartshares will buy index shares in the market-no brokerage fees
B. Buy smartshares units in the market(just like buying a share)-brokerage costs each time you buy. Only exchange of units(or shares) here.

Selling units is just like selling any other share(you need a buyer)-Liquidity is not great but decent(like most NZ shares)

Dividends-You can receive cash dividends or opt for DRP. Paid twice a year. For FNZ, the current yield is about 3-4%(after deducting the fees) MZY-about 1.5-2% Others-I dont know

I regularly invest in FNZ/MZY. I dont like the high fees but there is no other ETF option in NZ. When there is a better and low cost ETF, I will ditch them-cant see that happening in a small market like NZ.

I increase the contributions/invest lump sum during market correction.

Boring but decent way to play share market.

[peat]

For the Aussie shares there are a couple of listed entities which provide good exposure to Australia. These are Australian Foundation Investments and Argos Investments. There are also SPDR S&P ASX50 and ASX200 Funds. Also the smartOzzy covers the top 20 Australian shares but is overweight in banks and miners. SmartMOZY covers the Australian Midcaps - those ranked 51-100 in Australia. .
For NZ as you've said the smartFONZ covers the top NZ 50 stocks but theres also the smartMIDZ for the 11th - 42nd stocks and the smartTENZ for just the top10 (but this will be overweight TEL and FBU)
Kingfish is a NZ listed investment fund but this is not indexy enough for what you've said you require.


From reading the Investment Statement for smartShares here : http://www.smartshares.nzx.com/resou...ent%202010.pdf , they are listed so price can fluctuate around their actual value NAV (based on the shares they own) which means there would have to be willing buyers for you to sell. The investment statement says " Smartshares Units can be sold on market through NZX Firms. In this case, no written redemption notice is required. The market price per unit may vary from the net asset value per unit subject to supply and demand on market." They dont buy them back themselves unless you have 500,000 or more of them and invoke a basket Withdrawl.

But to buy them you can either do it through a NZX broker OR apply directly to smartShares and they will provide. I'm not sure if this means they will create new units or not to be honest. I think they may be able to do so in which case they will simply buy more appropriate shares. To be honest I dont think it matters much to an investor. They publish their holding and NAV every day. eg http://findata.co.nz/Markets/NZX/364...010_129955.htm

The dividend can be re-invested as more units or paid out as cash , your choice.

I suppose the main issues are the fee structures and whether you're happy with those... but if you're a small investor its a way of being in the market and diversified , with a good assurance that your investments performance will match the relevant index and the drip feed options are useful for long term ssavers.

[arcticblue]

Thanks for the responses and clarifying how it all works. Yeah I noticed the fee of 0.75% which I thought was steep considering what is required but there don't appear to be any other options at the moment and I don't have the funds to do it myself yet.

It sounds like the easiest way is just to treat them as a share and buy them via directbroking or similar.
FNZ.NZ should get me the NZX 50 and STW.ASX should get me what I want in Oz.

[RRR]

Good on you and all the best.

[peat]

Please make sure you read the section entitled Securities Lending Risk and understand the implications of that as following on from the information given that :

"The Manager intends, subject to amending the Trust Deed, to implement a securities lending programme in the next 12 months. Please refer to page 41 for further information on securities lending." That statement is included for all the specific funds.


It appears to me they are preparing to be allowed to lend the shares held in the funds to third parties. Presumably this is for others to go short (with fees collected but third party risk), or it could mean they are writing options with them in which case there is true risk that the strategy doesnt payoff. Each of these assumed strategies (as they say) exposes them to various risks either thirdparty risk or true speculative risk.

I could be being overly concerned - does anyone else have any comments on this.

[percy]

Please make sure you read the section entitled Securities Lending Risk and understand the implications of that as following on from the information given that :

"The Manager intends, subject to amending the Trust Deed, to implement a securities lending programme in the next 12 months. Please refer to page 41 for further information on securities lending." That statement is included for all the specific funds.


It appears to me they are preparing to be allowed to lend the shares held in the funds to third parties. Presumably this is for others to go short (with fees collected but third party risk), or it could mean they are writing options with them in which case there is true risk that the strategy doesnt payoff. Each of these assumed strategies (as they say) exposes them to various risks either thirdparty risk or true speculative risk.

I could be being overly concerned - does anyone else have any comments on this.

Would seem to me to place the word risk into what was a very safe investment.

[CJ]

Are they using investors money to create liquidity for others to go short so that the fund manager (ie. NZX) increases its profits?

How many conflicts of interest does the NZX have?

[peat]

Would seem to me to place the word risk into what was a very safe investment.

In a way the lending for other people to short makes some sense especially if third party risk insurance was taken out and this cost was less than the revenue generated.
But IF the writing of (covered call) options was done on the funds own behalf then yes I agree with you. Nassim taleb describes the risks of this strategy in his http://www.fooledbyrandomness.com/Technicalpapers.pdf on page 10 as :

Covered Calls Writing

: Investors have long engaged in
the “covered write” strategies in which the operator
sells an option against his portfolio which increases the
probability of a profit in return for a reduction of the
upside. There is an abundant empirical literature on
covered writes (see Board, Sutcliffe and Patrinos, 2000,
for a review, and Whaley, 2002 for a recent utilitybased
explanation) in which fund managers find gains
in utility from capping payoffs as the marginal utility of
gains decreases at a higher asset price. Indeed the fact
that individual investors sell options at cheaper than
their actuarial value can only be explained by the utility
effect. As to a mutual fund manager, doing such
“covered writing” against their portfolio increases the
probability of beating the index in the short run, but
subjects them to long term underperformance as they will

give back such outperformance during large rallies.

I am dubious they would do this.... I think the first option is more likely (as they are not expected to beat the index ) but it would be good to know for sure.
The problem with either of these possibilities is that while the risk is being increased for the investors the fees are staying the same for smaller investors (I think they reduced management fees for very large investors)
Theoretically the better they can do of course thats good as long as these benefits are passed on.

[arcticblue]

Thanks for pointing that out Peat. Upon more detailed reading it appears to greatly increase the risk. I couldn't find much info on how the possible profits of the 'lending securities programme' were going to be distributed but it did make mention of further 3rd party costs to manage the programme. From this it seems like the ones with the most to gain are smartshares/NZX since it would appear I will be taking the possible losses as well as mangement fee as well and it doesn't explicitly state I will get all the remaining profits, should there be any after the unspecified 3rd party management fee is taken.

I had assumed that because Smartshares was a wholly owned subsidiary of NZX that the chance of it going bankrupt was pretty low so the chance of me losing my investment that way was also low. However the extra risks Peat has pointed out lead me to believe these ETFs aren't quite as attractive as they first appeared.