ETF Exchange Traded Funds (ETFs) 2018

@ErYan Thanks, I did actually call Vanguard and the explanation wasn't particularly clear. Essentially, they said that AMIT hasn't been in place for the full financial year and therefore hasn't really had chance to take effect yet. In fact, the amount of capital attributed to me was actually 25% MORE than the amount of distributions I received across the financial year, which seems to go against the reason AMIT was introduced.

When I pushed them on this, Vanguard explained that AMIT would ultimately reduce the amount of CGT I pay once I sell the fund. In my eyes, if I'm planning to hold this for 20 + years, then that's a pretty poor reason to keep my holdings in the wholesale fund if I'm receiving taxable distributions that are four times larger than I would receive if I held VDHG in the meantime.

Does anyone have any thoughts on this/has anyone else been underwhelmed by the impact of AMIT so far?

Again, it seems like a no brainer to use VDHG over the wholesale version if I'm going to get slapped with a monster tax bill each year.

 

Did you read Bob”s previous post to this Whirlpool forum thread. I didn’t read it in detail but the final post sounded like it might be a strong possibility:

Vanguard launches diversifed index ETFs - Investing - Finance

Sounds more like an issue with hedging in general rather than the structure / AMIT?

 

Vanguard will allow you to leave the fund open if you have a balance of $5k

 

Worthwhile consideration as the $100K minimum for wholesale access might not always be so generous.

 

Exactly why I left mine open

 

These four Vanguard Diversified ETFs are appealing and have low fees but I suspect the similar premixed diversified offerings from Industry Funds will do better because they include unlisted commercial property and infrastructure. For example the twelve month returns to the end of May 2018 for the equivalent Hostplus options are 6.8%, 9.6%, 12.4% and 14%. I haven't been able to find the performances for the Vanguard ETFs, although I think Nodrog posted them a couple of months ago.
- Gormy

 

Great watch here, Charlie Ellis on how difficult the investment management world has become...

 

Swedroe: More Proof Active Falls Short | ETF.com

Of particular interest is IJR which is now available here as “locally domiciled”:

 

Can forward to the 12 Minute mark. Very good.

 

Brilliant stuff from Ellis as usual.

Even in the small cap space it’s becoming increasingly crowded with actives. Trying to find that successful “unusual” active Mgr who can avoid all the pitfalls mentioned by Ellis is getting harder and harder.

Referring back to my earlier post:

 

Weird they haven't updated their page regarding domicile
Investment Management, Risk & Advisory Services | BlackRock

By the way, if you were in acquisition phase and using VTS/VEU instead of VGS for international, would you tilt with some IJR, and if so, what proportion do you think you would use for VTS:IJR (remembering that VTS already contains about 10% small & 20% mid caps)?

 

Why do you want to tilt away from the index weightings?

Big companies are big for a reason and small ones... leads me to be happy with index weightings for indexing without tilting.

 

Thanks @Hodor, always appreciate your thoughts.

As I understand it, large companies have their future earnings already factored into the price, whereas this is less of the case with smaller companies so there is more room to grow. For example, it'd be harder to increase profits from 25bn to 50bn than 100m to 200m.
At the same time, there are a lot of small companies who won't do well.
As a result, I believe small caps have shown long term higher return but also higher risk (ie volatility), so while the risk-adjusted return is similar, the overall long term return is higher.

Some suggest 1/4 in small caps, and a number of others up to 1/2. Both if which are much more than the cap weighted amounts, but 1/2 seems like a lot.

 

What needs to be understood is that small cap outperformance has historically happened in short, large bursts...and then gone missing for a long time....decades. You need to be comfortable that this time its not different, and the small cap premium will present during your investment period. If you think you might chuck it in after 10-15 years or lagging cap weight (very likely!) dont bother.

 

Thanks for mentioning that Falcon. Being more risky for so long would be exacerbated the more you overweight, so, good reason to be cautious and not tilt too much if you choose to do so.
I guess same applies to all higher risk & return classes
- Au small caps
- US small caps
- Ex US small caps
- EM

 

Great point. This is an even greater problem for an investor nearing retirement or in the earlier stages of retirement. The overall market is risky and problematic enough sequence risk wise let alone dealing with even riskier niche sectors such as small caps which can underperform the overall market for very long periods of time. Regret in investing can be a painful experience, I’m trying to reduce the number of things I can get wrong to avoid it nowadays.

 

Does anyone have a link to share that shows an unbiased Australian focused performance comparison of Small Cap vs Large Cap over the long term? I couldnt see anything in Google.

Edit: A better way to measure Australian small caps - Cuffelinks

"Over the long term, the small cap index has underperformed the large cap index by around 2.8% p.a. (since 1990) and has done so with 25% higher risk. That’s not to say there are not significant opportunities in small caps from time to time, with the performance differentials between small and large cap significant over the short term. Actively managing the rotation in and out of the small cap market should be a consideration, and timing is important.
....
-The small cap index is poorly constructed and suffers from significant structurally lower long-term performance, higher risk, and poorer earnings growth characteristics.
-Active management of this part of any Australian equity exposure is both essential and rewarding...."

I think the jist of the article is that small cap ETFs are bad, and possibly small cap LICs as well. So instead choose a active manager that can switch between the different market spectrum (eg From Large to Small and back again based on market cycles).

 

Thanks @Nodrog that does make sense.

The only thing that surprised me over on the Whirlpool thread is that people investing in the High Growth option seem to actually WANT large taxable distributions.

Surely if you're selecting the high growth option rather than one of the higher income options, then your aim is to reinvest distributions to maximise long term growth rather than take huge taxable distributions each year that actually reduce the size of your investment portfolio.

 

Your logic sounds sensible to me.

However in some cases it depends on the structure they’re investing in. For example in Super pension mode there’s NO CGT. Even so it would appear to be less common that someone invested in the high growth option is looking for high distributions.

Currency hedging can be a real pain for unwanted tax inefficient distributions at times and it can mess terribly with distribution reliability.

If you’re not too suseptible to behavioural issues likely better to invest in individual asset classes to avoid unwanted tax events. Get rid of anything with less than 5 or so percent allocation as it won’t have any meaningful impact on your portfolio. Simply rebalance using new cash when accumulating.

After doing this Vanguard’s high growth fund could potentially be reduced to three asset classes being VAS / VGS / VAF or what Bogleheads affectionately call the “Three Fund Portfolio”.

Not advice.