Best way to invest in a diversified index fund

If choosing Vanguard - the easiest way is to set up a Vanguard Personal Investor Account and buy directly through them.

You pay no brokerage fees to buy Vanguard ETFs and a flat $9 brokerage fee when you sell. There are no portfolio management fees - just the regular ETF management fee (0.27%pa for VDHG).

They have full auto-invest support as well.

Just read the documentation carefully on their website - there are some gotchas at this point because the platform is so new and not all features are available yet. For example, you can't (yet) transfer ETF holdings from other brokers to your Vanguard Personal Investor account, and you can't trasnfer holdings out. This generally isn't a problem if you're looking for a long term buy-and-hold, and hopefully they'll get these features added in due course.

 

One other gotcha with Vanguard - it's really easy to transfer money in, and I found transfers happen from my SMSF bank account (Macquarie CMA) within minutes - they even send you a text message when the money arrives in the account, which is great!

However, my understanding is that you earn zero interest on any money in the cash account - which is presumably how they are making some of the money for the platform without charging portfolio fees?

So not a great idea to park large amounts of money in the cash account.

Other gotchas with auto invest:

• Auto invest plans cannot be edited, you'll need to cancel them and recreate them to make changes
• You can only have one auto invest plan for your account - but you can invest in multiple products at once
• Investment transactions take 4 days after the scheduled regular deposit date
• Managed funds can invest a minimum of $1, but ETFs are a minimum of 1 unit (you can only buy whole shares), so for example, VGS has an effective minimum purchase of $121.29 based on current share price - any shortfall will remain in the cash account until there is sufficient available to purchase a whole number of shares in a future cycle
• You can't purchase non-Vanguard ETFs or ASX direct shares using auto invest

 

From the Vanguard Personal Investor Guide:

The Interest retained on the Vanguard Cash Account is the difference between the amount of interest earned on the pooled cash held in the omnibus accounts at our authorised deposit-taking institution and the interest we credit to your Vanguard Cash Account (if any). This amount is calculated daily on the value of your Vanguard Cash Account balance and is received monthly by Vanguard before the Vanguard Cash Account Interest Rate to investors is declared (if any). It is not an amount that is deducted from your Account.

For financial year ending 30 June 2023, the Interest rate retained on the Vanguard Cash Account was 1.04% p.a., and for the financial year ending 30 June 2024, the interest rate retained is anticipated to range between an estimate of 4.50% and 5.00% p.a.
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Given how easy it is to move cash into or out of your Vanguard Personal Investor account, I don't see a huge issue with this - keep your cash in your high interest bank account until ready to invest and then transfer it across or use auto invest. The amount of money left in your Vanguard cash account should be relatively small and thus interest lost won't be much.

The only time you'd need to maintain a cash account balance greater than zero is if you hold non-Vanguard investments - the 0.10% pa of the value of those investments is deducted quaterly from your cash account.

If using auto-invest to buy Vanguard ETFs, there will be amounts left over from purchasing whole units in the ETF that will remain in your cash account until the next auto-invest cycle at which point it is pooled with your next automatic deposit and applied to that purchase.

 

I don't use auto invest yet - I've only had the account for a few weeks and am currently DCA'ing largish amounts manually into it every month or so from our pool of cash.

However, once we've fully allocated that cash, I will be revisiting the auto invest - I'm undecided yet whether to continue investing manually or to use the auto invest function.

I'm not overly concerned about the 4 day delay - I suspect it's to allow 2 days for the funds transfer to complete and then another 2 days for the investment to be complete.

My main concern about doing it manually is forgetting or getting lazy - that's kind of the point about the autoinvest - you don't have to think about it. I don't think 4 days delay is going to make a huge difference in the long term for auto invest amounts.

If you're autoinvesting $10,000 at a time and it would otherwise be sitting in a bank account earning 5%pa, you'll lose around $5.50 in interest by delaying 4 days. However, looking at the bigger picture - the markets only have to go up by 0.05% for you to make that money back, so it's not really a huge loss over the long term.

 

From the Vanguard FSG (https://fund-docs.vanguard.com/AU-Vanguard_Financial_Services_Guide.pdf)

Assets held by Vanguard Where Vanguard holds assets on your behalf through the Vanguard Personal Investor IDPS, Vanguard will hold such assets on trust for you. Where a sub-custodian is appointed to provide custody services in relation to certain assets, they will hold those assets on trust for us and we will in turn hold the interest in those assets for you. The role of the sub-custodian is to hold, maintain and deal with assets in accordance with directions received from us. The directions we give the sub-custodian will be based on instructions that we receive from you.

Vanguard and any sub-custodian appointed by Vanguard may hold your assets in omnibus accounts pooled together with the assets of other investors. Records are maintained to enable the proper attribution of assets and income to you and each other client.

Where you invest in the Vanguard Personal Investor IDPS, a Vanguard Cash Account will be opened for you. The cash held within your Vanguard Cash Account will be pooled with the cash balance of other investors and invested in bank accounts with Australia and New Zealand Banking Group Limited (ANZ). Vanguard receives a fee for managing your Vanguard Cash Account as described in the IDPS Guide.

When you apply to invest in the Vanguard Personal Investor IDPS, you consent to the use of omnibus accounts by Vanguard and any appointed sub-custodian.​

You can read more about Vanguard's use of custodian services here: Understanding the role of custodians

For some additional interesting reading, some discussion about omnibus accounts can be found here:

• https://download.asic.gov.au/media/motnicxg/rg133-published-23-june-2022.pdf
  
• https://www.asx.com.au/documents/clearing/FSS_Implementation_FS.pdf