ETFs proved to be a popular option for investors in 2020. The Australian ETF industry grew by $33 billion over the year to reach $95.2 billion – an all-time high, according to the BetaShares Australian ETF End of Year Review.
BetaShares found that the industry’s growth in 2020 was entirely driven by net inflows, with $20.5 billion of new money flowing into the industry over the course of the year. “This represents by far and away the highest annual inflows on record, representing a 59% increase in flows from the previous year’s figure,” said the report.
“Our internal analysis also indicates that a higher proportion of these flows than ever came from direct individual investors, with hundreds and thousands of new, often young, investors entering the sharemarket for the first time via ETFs in 2020.”
Low fees are a big part of the appeal of ETFs, with fees starting as low as 0.03%pa. “ETFs are a great investing innovation and fees are likely to drop further as they receive greater adoption and continue to scale,” said Marc Jocum, investment associate at Stockspot.
Not all ETFs are cheap, though. Some can be a lot more expensive. The more specific or ‘exotic’ an ETF, the higher the fee is likely to be and there will probably be fewer offerings to choose from, explained Evan Lucas, chief market strategist at InvestSMART.
The 20 Cheapest ETFs on the ASX
So what are the cheapest ETFs on offer? The table below shows the 20 cheapest ETFs ranked by Management Expense Ratio (MER) to 31 January, 2021.
As you can see the list includes international share ETFs, Australian share options as well as a cash ETF and a few fixed income options.
20 Cheapest ETFs on the ASX by Management Expense Ratio (MER)
|Sector||MER||Average Annual Return|
|1 Year||3 Years||5 Years|
|VTS||Vanguard US Total Market Shares Index ETF||Equity – Global||0.03%||5.26%||14.45%||14.82%|
|CRSP US Total Market Index||5.30%||14.46%||14.83%|
|IVV||iShares S&P 500 ETF||Equity – Global||0.04%||1.91%||13.35%||14.03%|
|S&P 500 Index||1.75%||13.21%||13.97%|
|IJR||iShares S&P Small-Cap ETF||Equity – Global||0.07%||7.14%||10.78%||13.19%|
|S&P Small-Cap 600 Index||6.99%||10.51%||13.05%|
|IJH||iShares S&P Midcap ETF||Equity – Global||0.07%||2.98%||9.60%||11.95%|
|S&P Mid-Cap 400 Index||2.87%||9.38%||11.84%|
|BILL||iShares Core Cash ETF||Cash||0.07%||0.30%||1.22%||–|
|S&P/ASX Bank Bill Index||0.29%||1.21%||–|
|A200||Betashares Australia 200 ETF||Equity – Australia||0.07%||-3.27%||–||–|
|Solactive Australia 200 Index||-3.21%||6.99%||9.99%|
|IWLD||iShares Core MSCI World All Cap ETF||Equity – Global||0.09%||0.24%||9.49%||–|
|MSCI World Investable Market Index||1.39%||10.15%||–|
|IOZ||iShares Core S&P/ASX 200 ETF||Equity – Australia||0.09%||-3.17%||6.87%||9.88%|
|S&P/ASX 200 Accumulation Index||-3.11%||7.00%||10.03%|
|VEU||Vanguard All-World ex US Shares Index ETF||Equity – Global||0.09%||0.50%||5.20%||8.70%|
|FTSE All World Ex-US Index||-0.02%||5.27%||8.98%|
|SPY||SPDR S&P 500 ETF Trust||Equity – Global||0.0945%||2.16%||13.57%||14.11%|
|S&P 500 Index||2.30%||13.73%||14.29%|
|IHVV||iShares S&P 500 AUD Hedged ETF||Equity – Global||0.10%||11.42%||8.74%||14.41%|
|S&P 500 Hedged AUD Index||12.46%||8.90%||14.37%|
|VAS||Vanguard Australian Shares Index ETF||Equity – Australia||0.10%||-2.56%||7.09%||10.06%|
|S&P/ASX 300 Index||-2.69%||7.13%||10.14%|
|IHWL||iShares Core MSCI World All Cap (AUD Hedged) ETF||Equity – Global||0.12%||8.30%||6.32%||–|
|MSCI World Investable Market AUD Hedged Index||10.34%||7.22%||–|
|ISEC||iShares Enhanced Cash ETF||Cash||0.12%||0.55%||1.42%||–|
|S&P/ASX Bank Bill Index||0.29%||1.21%||–|
|IYLD||iShares Yield Plus ETF||Fixed Income – Australia Dollar||0.12%||–||–||–|
|Bloomberg AusBond Credit and FRN Ex Big 4 Banks Index||–||–||–|
|STW||SPDR S&P/ASX 200||Equity – Australia||0.13%||-3.11%||6.86%||9.84%|
|S&P/ASX 200 Index||-3.11%||7.00%||10.02%|
|E200||SPDR S&P/ASX 200 ESG Fund||Equity – Australia Strategy||0.13%||–||–||–|
|S&P/ASX 200 ESG Index||–||–||–|
|IAF||iShares Core Composite Bond ETF||Fixed Income – Australia Dollar||0.15%||1.51%||5.18%||4.04%|
|Bloomberg AusBond Composite Index||1.68%||5.36%||4.22%|
|ICOR||iShares Core Corporate Bond ETF||Fixed Income – Australia Dollar||0.15%||–||–||–|
|Bloomberg AusBond Credit 0+ Yr Index||–||–||–|
|VETH||Vanguard Ethically Conscious Australian Shares ETF||Equity – Australia Strategy||0.16%||–||–||–|
|FTSE Australia 300 Choice Index||–||–||–|
Source: www.canstar.com.au. Prepared on 4/03/2021. Management Expense Ratios and Sector categories sourced from the ASX Investment Products January 2021 monthly update. ETF and Benchmark returns are effective to the end of January 2021 and are sourced from the providers’ sites. Whether or not management fees are taken into account in the return figures differs by provider, refer to the provider’s site for more information. Table sorted in ascending order by MER, followed by descending order by 3 year return. Past performance is not a reliable indicator of future performance.
Where available, the table also includes one-, three- and five-year returns, as well as the returns of the index it tracks, so you can get an idea of how these ETFs have performed.
The table below displays some of the International Broad Based ETFs available on Canstar’s database with the highest three-year returns (sorted highest to lowest by three-year returns and then alphabetically by provider name). Use Canstar’s ETF comparison selector to view a wider range of products. Canstar may earn a fee for referrals.
Why an ETF may have a different return to its index
You will notice that the return may be different to the index – in most cases it will be lower. Why is that? “This is what is often referred to as ‘tracking error’ or ‘tracking difference’ in the industry,” Mr Jocum told Canstar. “Fees contribute to a difference in returns. For example, both STW and IOZ track the same index (the ASX 200), but while the index returned 10.7%pa over the past five years, STW and IOZ returned 10.5%pa and 10.6%pa respectively.
“However, fees are not the only factor affecting this difference in returns. The ETF may choose to replicate the index by buying all the underlying shares. For example, an ETF that tracks the ASX 200 would buy all 200 shares in their basket of securities. However, not all types of ETFs replicate their index in this way, and therefore their returns will be different to the index returns.”
Another explanation for tracking differences is if an ETF employs securities lending, which is when the underlying shares in the ETF are lent out to investors, explained Mr Jocum. “The incremental revenue from this type of lending can sometimes help boost the return of the ETF, leading to differences in performance with the underlying index.”
→ Related: Which ETFs have the highest returns?
Why fees matter
“When choosing ETFs, fees are one of the most important factors to consider. That’s because the less fees you pay, the more returns you can keep in your pocket,” said Mr Jocum. “Many people tend to hold ETFs over a longer period of time, and generally speaking, the longer you hold an investment, the more important fees become.”
Mr Lucas agrees, saying that over the long term even a 0.5% difference in fees can have a big impact on your returns. Mr Lucas provided the below chart from the Grattan Institute which shows the impact fees could have on retirement balances. Even a fee of 1% can reduce retirement income by more than 20%, assuming a 40-year contribution period.
Retirement balances relative to fund with zero fees, per cent
You also need to factor in transaction fees, such as brokerage, pointed out Mr Lucas. For example, if you invested $1,000 and paid $20 brokerage to buy the ETF and a further $20 to sell, you would need to make at least $40 to break even on that transaction. Add in the management fee and the return will need to be even higher. “The lower the fees the better your compounding returns will be over the long term,” added Mr Lucas.
Key factors to consider when choosing ETFs
Of course, fees aren’t the only thing to consider when choosing an ETF. “To make a decision about two different ETFs, an investor shouldn’t just consider fees and performance. It’s also important to consider other factors like diversification (the different types of assets, companies, sectors and regions the fund is spread across), liquidity (how easy it will be to sell), the bid-ask spread (trading costs), and size (how much money is in the ETF),” said Mr Jocum.
“For example, at Stockspot we invest in the more expensive emerging markets ETF (IEM) as opposed to the cheaper Vanguard alternative (VGE) because IEM has exposure to more emerging market countries and has also outperformed VGE over the long term.”
Although fees are one of the main factors InvestSMART considers when it chooses ETFs there are several others, Mr Lucas told Canstar. One is market capitalisation or funds under management. Generally, the bigger the fund the more liquid it is likely to be. “Smaller funds can be sluggish and their ability to replicate the market can be harder,” explained Mr Lucas. InvestSMART also looks for ETFs that offer as close a replication of the underlying market as possible.
The price per unit is another important consideration, said Mr Lucas. He offered the example of two ETFs offering exposure to the ASX 200 – the Betashares Australia 200 ETF (A200) with an MER of 0.07%pa and the iShares Core S&P/ASX 200 ETF (IOZ) with an MER of 0.09%pa.
“Although A200 is cheaper at 0.07%, its price per unit is very expensive,” said Mr Lucas. “At $113 our ability to buy enough units to meet each portfolio’s required risk weighting is very constrained when compared to IOZ’s price per unit of about $27 which does allow us to weight each portfolio more easily,” he explained.
Cover image source: Christian Horz (Shutterstock.com)
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