We looked at the cheapest ETFs on the ASX as it is well reported investment management fees can have a large impact on the portfolio’s returns over the long run. The impact of fees has the opposite effect dividend compounding where overtime it detracts from the returns of the investment. Naturally, the higher the fee, the greater the drag it has on the power of compounding over time.
Lowest Cost ETF List
We went through our ASX ETF list and pulled out the 10 cheapest exchange traded funds listed on the ASX for those that are looking for the cheapest ETFs listed on the ASX.
A common theme running through the list of low cost ETFs below is the aside from a BILL, all of the exchange traded funds are index funds which tracks the major equity markets around the globe. The primary goal of the index funds to replicate the performance of the underlying index as opposed to try to pick winners and avoid losers in the portfolio.
This make intuitive sense as the largest market by definition are the most liquid and attract capital. The more capital there is the greater the efficiency can be extracted from managing the capital and this is passed onto the investor.
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Vanguard vs State Street – ASX VTS vs IVV
Vanguard lives up to its reputation as a low cost index fund provider through Vanguard U.S Total Market Shares Index ETF offering the lowest cost ETF at 0.03% (ASX VTS). VTS tracks the performance of a diversified US equity market index with 3,500 holdings.
Similarly Blackrock manages the iShares S&P 500 ETF (ASX IVV) which tracks the Standard and Poor’s 500. S&P 500 is most well known and quoted diversified market benchmark in the world and represents the 500 largest companies listed in the US. As the landscape for AUM is extremely competitive and the cost is one of the primary consideration investor evaluation of what is an effectively commodity product. Blackrock only charges 0.03% in management of IVV.
Difference in VTS and IVV Holdings
Whilst there is difference in the total number of companies held in both ETFs, the returns are most similar as both are market cap weighted ETFS. This means the performance of the larger companies will have a more meaningful impact on overall portfolio returns than smaller companies. VTS holding more than 3,500 companies while beneficial from a diversification perspective does not dissipate the impact of the large companies in the index.
- Top 700 companies in VTS make up 90% of the portfolio exposure
- Top 500 companies in VTS make up 85% of the portfolio exposure
The incremental ~2,000 companies only make up to 10% of the portfolio it can be argued the cost of managing the rest of the position outweighs any diversification benefit.
VTS Sector Exposure
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FX Risk
Both funds invests in the US market which means for Australia there is FX risk exposure. These are unhedged vehicles and the ultimate return will be dependent on the exchange rate changes between the time of purchase and sale.
IVV and VTS Dividends
VTS and IVV dividends are paid quarterly and it is a pass through of the underlying dividends of the companies in the fund. The dividend yield for US stocks is generally lower as Australian investors in Australian companies benefit from dividend imputation credit. Dividend from US companies is double taxed, once at the corporate level and again when the dividend is paid out. Hence this is the primary reason US companies prefers buyback rather than dividend as a primary means of returning capital to shareholders.
Australian Low Cost ETFs
There are also two exchange traded fund on the list which tracks the Australian market. iShares Core S&P/ASX 200 ETF tracks the ASX 200 benchmark, the most widely quoted domestic market index.
Similarly Betashares Australia 200 ETF tracks 200 stocks on the ASX but based on an index benchmark created by Solactive vs Standard and Poor which officially manages the primary ASX 200 index.
In addition to the 2 ETFs mentioned above, most of the funds on the list are offshore broad market index fund replicated locally to enable access for Australian investors.
Finally, it is important to note that only because a fund has low fees does not mean it is the right option for the investor. Mostly these funds are equity funds. From a diversification and asset allocation perspective it might not be the right option for everyone. As always it is important to evaluate the investment if it meets the investors needs first before thinking about the fees.
List Cheapest Bond ETF
As a bonus the list below compares the management fees of the Australian bond ETFs listed on the ASX. It is interesting that the fees for bond ETFs are generally higher than equity ETFs. We think since most of the equity ETF tracks market cap weighted indexes these are much easier to replicate than bond index.
An equity ETF just have to buy shares of the company in the exact percentages to replicate the index while in a bond index because the number of bonds per issue is finite and traded over the counter.
- Theoretically bond indexes are constrained by the number of bonds available in each issue.
- The manger has to source the bonds from counterparties each time they want to trade.
Because of these two structural constraints the cost of managing a bond ETF is much higher than the equivalent equity ETF.
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Cheapest Australian Bond ETF
The list of cheapest bond ETFs shows the fee range is consistently between 0.15% to 0.25%. iShares Core Composite Bond ETF (IAF) is the largest Australian bond ETF listed on the ASX with the lowest fee at 0.15%. Whilst IAF tracks the index which includes investment grade bonds, the portfolio also includes Australian government bonds.
Government bonds are some of the most liquid securities in the market, and because of the better liquidity the cost of trading these securities are much cheaper than corporate bonds. Given the competitive nature of the ETF space, the lowest trading cost is passed on to the management cost of the ETF.