Managed Funds Vanguard

Older LICs vs ETFs

The older LICs are limited to less than 5% or so turnover pa as required by ATO to maintain their 50% CGT discount status. Companies aren't generally entitled to the 50% CGT discount. LICs are an exception by law provided they seek a ruling from ATO for same. But that then limits their turnover to less than 5% pa. So these LICs can't sell more than this limit even if they wanted to. This could be considered restrictive in an increasingly rapid changing world ripe with disruption. It is a risk that needs to be considered.

The Index ETF product has no such restrictions. The trust structure automatically entitles them to the CGT discount regardless of how much turnover there is. So should there be major disruption in ASX the Index will automatically change to reflect this. Out with the bad / irrelevant and in with the good / relevant.

So a sensible long term LIC investor may choose to reduce "restrictive" turnover risk by owning STW / VAS in addition to the older LICs. That also has another advantage of being able to buy LICs when at a discount and STW / VAS when LICs are at a premium.

STW vs VAS

Now we come to which is the best ETF structure.

STW has the advantage in that it's a stand alone ETF. VAS is not, it's a separate class of units invested in Vanguard's underlying unlisted wholesale fund. Hence STW has none of the capital return issues that could happen when there's a large redemption in Vanguards underlying wholesale fund flowing through to VAS from what I understand.

STW is also by far the largest local ETF with great liquidity, lowest spread and lowest turnover thereby being most tax efficient as detailed in my earlier post / link:

So my preference is for STW given the above reasons. Plus as I already own Vanguard product VGS then if owning STW it gives Fund Mgr diversification. Of course it's not uncommon for investors to own VAS and STW together.

ETFs vs Unlisted Managed Funds

Behavioural issues aside I personally believe ETFs are a far superior product compared to unlisted managed funds. See following:

More detail about the ETF redemption process:
https://www.spdrs.com.au/education/files/How ETFs Are Created and Redeemed.pdf

Ok let the discussion continue in earnest.

Please remember also I'm just an amateur so don't take any of my ramblings as gospel.

PS: I was not of sound mind last night when posting. Enjoyed just a bit too much home brew and my beer yoga session didn't quite work out too well:

 

Meant to add a small negative of STW is the slightly higher fee. They seem to be more reluctant to reduce fees compared to Vanguard. That's one avantage of the large FUM due to the the combined ETF + unlisted fund structure of Vanguard. Greater FUM can result in lower fee.

 

Thanks @austing

The benefits of STW being the largest ETF is it provides the most liquidity. VAS is second largest.

But when you look at new fund inflows VAS seems to be getting the highest amont. So may be in 5-10years VAS might overtake STW and this should gradually eliminate their liquidity and bid/ask spread. It might also reduce impacts of large CGT distributions as even a large withdrawal might not cause significant selling as percentage of FUM.

Reason I like VAS is they have always believed in charging the lowest fees. I remember few years back they charged 0.18% but gradually they have brought it down to 0.14% and am very confident it will keep going down as their size grows. STW even though being the largest ETF still charges 0.29% and if it were not for Vanguard being their competitor they might have charged north of 0.50%.

Cheers
Oracle

 

Yes as I reflect on this it's not a straight forward decision. I originally invested in STW as that was the only ASX index ETF available back then in 2002. In terms of longevity of product my gut tells me that Vanguard ETFs are the most likely to be around in the very long term. And that's a very important consideration.

I did state that STW appear reluctant to lower fees. VAS increase in market share and lower fees seems to have been the catylist for STW's fee Reduction. Then VAS lower their again to 0.14% but STW's still sitting at 0.19%.

As you say the low fee is what attracts the average investor. The Vanguard name and ongoing fee reduction is what's likely driving the greater fund inflows compared to the others. The average investor is unlikely to know or care about class structure and redemption issues.

The other issue with STW given its larger size, spread and liquidity is that it's used a lot more by traders and Instos for short term reasons. So perhaps the FUM isn't as "sticky" as that of VAS.

I haven't invested in ASX ETFs for awhile so any others with views post away. I'm certainly no expert on this.

I'm sure @Il Falco (alias Snidely) will pop in here at some stage armed with a few grenades.

 

I have a large % of assets allocated to STW (ASX200) but over more recent years have moved to VAS (ASX300)

STW pays its dividends twice a year, whereas VAS pays quarterly, DRIP is on the same basis

Reddit

The biggest difference in my opinion is the ownership structure. STW is run by State Street Global Advisors, which in turn is owned by State Street Corporation, which is a for profit business. You can literally buy their shares, and profit from people buying into the STW ETF. On the other hand Vanguard has a special ownership setup, which makes you the shareholder of vanguard itself. See this post jlcollinsnh.com - what if vanguard gets nuked?. Essentially if a private corporation goes bankrupt, it can be very hard to recover all of your money. If it happens to vanguard, no big deal, the underlying shares in the ETF are still intact! Oh and if you time, read the rest of the stock series on Stock Series, great stuff.

 

STW also now distributes quarterly.

I do agree that it's likely run more for the benefit of shareholders rather than investors.

 

When we refer to 'unlisted managed funds', I presume this would include Vanguard Wholesale Funds? @austing you seemed to be an advocate of these funds fairly recently, but have gone on to say that ETFs are a far superior product. Or am I barking up the wrong tree?

 

I did say "behavioural issues aside ...".

Behaviourial issues are the reason why most investors fail. Eg buy in boom times then sell due to fear in gloom, thinking you can time / beat the market, overconfidence, chopping / changing / fiddling.

Hence despite wholesale unlisted funds being less tax efficient etc than ETFs / LICs they can be perfect for investors who need protecting from themselves. Once initial contribution is made to kick off the managed fund account then setup periodic BPay contributions and forget about it. The alternative of opening a broker account to buy ETFs / shares / LICs on market can lead to all sorts of destructive behaviour with some investors.

What is required by most is a good solution that works for them (something they can stick with) even if it is not the perfect solution on technical merit such as tax efficiency etc.

 

Brilliant post!

 

That clears that one up. By tax efficiency, we're exclusively referring to franking credits I assume? It would appear that as the Vanguard High Growth Wholesale Fund (for example) slightly realigns its asset allocation away from Australian equities, the 24% franking passed down in 2016 could slide even lower.

 

No, I was referring to redemptions as detailed in my previous post. Reread it again carefully:

 

Same issue between say VAS, and Vanguards Australian Share Fund (unlisted). I think there is no difference between the two from a tax efficiency perspective, whereas STW is a different matter.

 

We need to be clear about types of unlisted managed funds we are looking at. This is the subject of another post yet to be written

 

Yes it's a damn pain as I like Vanguard in that I feel they're the most likely to be around in the very long term. But it's hard to ignore the issues that are a result of it not being a stand alone ETF. Unlike a pure ETF VAS just like the unlisted product is at the mercy of inflows:

 

A little ironic for a bunch of capitalists lol.

Need to understand that the management of the Australian domiciled funds is by Vanguard Australia, a wholly owned subsidiary of Vanguard USA, which is owned by the unit holders in the US domiciled funds. So, for Australian holders the alignment is not the same.

The ownership structure of the funds, i.e. Each is its own trust, not owned by Vanguard is the same and should theoretically protect holders from a Vanguard specific black swan.

 

Well young Snidely get too it. You know I look forward to your posts. Unlike us retirees who are constantly busy you no doubt have a lot more time on your hands.

And speaking of being busy we're off to the coast again on Tuesday for a few days at Mantra. It never stops, phew:

 

A couple more articles on Stand-alone vs share-class ETFs:

https://advisors.vanguard.com/iwe/pdf/standAloneTrans.pdf

Settling The Share Class Debate | ETF.com

As an aside the potential CGT issue discussed in recent posts is much less of a concern to those investing in a tax free Super pension account.

Despite my head telling me STW might be be technically better given it's a stand alone ETF my gut and SANF favours VAS. Given I don't own either at this stage combined with early onset senility entitle me to change my mind.

 

And just to keep @Redwing smiling (no gloating please) I though it worthwhile reposting the following article on the simple Vanguard three Fund portfolio vs the experts:

How the Bogle Model Beats the Yale Model

Bogle vs. Goliath

 

The Other Difference Between Mutual Funds and Jeans

Vanguard is dominating the fund business, and the numbers are staggering. It managed $1 trillion seven years ago; now that figure is $4.2 trillion. According to Morningstar, Vanguard took in $823 billion over the last three calendar years. That’s 8.5 times more than the net assets that flowed to the rest of the industry combined.

It’s not hard to see why Vanguard is so popular. (I’m one of its 20 million investors.) Vanguard famously charges low fees for its mutual funds and ETFs. According to Vanguard, the average expense ratio of its funds is just 0.12 percent. Vanguard is also owned by its investors, which allows it to return profits back to them in the form of even lower fees.

But every dynasty eventually attracts detractors, and Vanguard is beginning to take some heat. One recurring criticism is that its low-cost indexing approach has ignited a crusade against the higher fees charged by other fund companies -- and the fat profits that those fees generate. A fund, the critics argue, is a product like any other and entitled to turn a profit. Why, then, don’t the fee-crusaders scrutinize the prices and profits of companies that sell other products, such as autos or mobile phones or jeans?

 

Well Bogle always said "Fees matter"

Earlier this month, Vanguard announced plans to sell its wide range of ETFs, including its popular LifeStrategy funds, direct to consumers, bypassing brokers and financial advisers

The new online service, VanguardInvestor.co.uk, allows private investors to open an account with as little as £500 or a monthly investment of £100.

Its flat administrative fee of just 0.15 per cent is capped at £375 a year, significantly undercutting Hargreaves Lansdown at 0.45 per cent or Fidelity at 0.35 per cent. Its fund range also has low underlying charges, often about 0.22 per cent.

Damien Fahy, founder of investment website MoneyToTheMasses.com, says this could prove a “watershed moment” as Vanguard’s pricing structure completely undercuts its competitors: “If someone invested their full £20,000 Isa allowance, they would pay total charges of just 0.37 per cent a year.

On some of the bigger established platforms you pay more than 1.8 per cent.

“That might not seem a big difference, but annual charges compound year after year, ultimately costing investors outsized sums.”

If you invested £20,000 and your money grew at 5 per cent a year with charges of just 0.37 per cent, after 20 years you would have £49,450. With fees of 1.8 per cent you would have just £37,550, an incredible £11,900 less.

When Vanguard announced its move, the Hargreaves Lansdown’s share price fell sharply, as investors feared it would be forced to cut its prices to compete, hitting its profitability.