Australian share ETFs continue to gain in popularity. As of April 2019 there is over $16 billion invested in ETFs tracking Australian shares, up 20% from the previous year.
Each year we compare all 190+ ETFs in our Australian ETF Report. Here we road test 5 popular Australian share ETFs, comparing them across 6 factors:
What are ETFs?
ETFs track a market index rather than taking bets on individual companies. For this reason, their management fees are much lower than typical ‘active’ fund managers. Tracking a market ‘index’ also offers the benefits of transparency and potential tax efficiency. ETF investors directly benefit from share capital gains, dividends and franking credits paid by shares contained within an ETF.
|ASX code||ETF name||Size ($M)*|
|STW||SPDR S&P/ASX 200 ETF||3,578|
|VAS||Vanguard Australian Shares Index ETF||3,458|
|IOZ||iShares Core S&P/ASX 200 ETF||1,142|
|MVW||VanEck Vectors Australian Equal Weight ETF||708|
|A200||BetaShares Australia 200 ETF||545|
*Total fund assets under management at 1 April 2019
STW and VAS are the largest Australian share ETFs managing $3.6 and $3.5 billion respectively. MVW has been growing fast and now manages $700m while the newly launched A200 ETF from BetaShares debued in May 2018 with $50m under management and has since grown to $545m.
Size is important because ETFs must reach a certain size to become viable. As ETFs gather more assets it becomes easier for them to cut their expense ratios (fees) to continue attracting more funds. On the other hand, ETFs which haven’t achieved critical mass sometimes shut down and return investor funds or increase their fees to cover their costs.
STW is the most profitable ETF of this group: $3,578m charging 0.19% p.a. which earns them $6.8 million in revenue per year, more than enough to be sustainable. If anything this product is likely to come under pressure to reduce its fees again as Vanguard closes in on its assets.
On the other hand the recently launched A200 is earning $381,000 p.a. in fees based on its $545 million AUM. BetaShares will be hoping it can continue to amass significant funds so that fee revenue allows this product to be financially viable for them.
|ASX code||ETF name||MER (% p.a.)|
|STW||SPDR S&P/ASX 200 ETF||0.19|
|VAS||Vanguard Australian Shares Index ETF||0.14|
|IOZ||iShares Core S&P/ASX 200 ETF||0.15|
|MVW||VanEck Vectors Australian Equal Weight ETF||0.35|
|A200||BetaShares Australia 200 ETF||0.07|
ETF expense ratios are becoming more competitive in Australia. In 2015 STW lowered its MER from 0.29% to 0.19% in response to competitive pressures from VAS and IOZ which were gaining market share with fees of 0.14% and 0.15% respectively. Since then STW has continued to lose share to Vanguard.
Until recently VAS was the lowest fee option in the category at 0.14% p.a. however this was recently undercut by BetaShares when they launched A200 at 0.07% p.a. This sent a strong signal from BetaShares that it intends to compete with State Street, Vanguard and iShares in this category.
The 4 lowest cost ETFs are now within 0.12% p.a. of each other on fees. That’s great news because costs are one of the only factors you can fully control when investing in Australian shares. The less you pay a fund, the more of the returns you keep in your pocket.
That said, costs have converged to the point where investors need to carefully consider other factors including the funds commercial viability, liquidity and track record.
|ASX code||ETF name||% Spread|
|STW||SPDR S&P/ASX 200 ETF||0.04|
|VAS||Vanguard Australian Shares Index ETF||0.04|
|IOZ||iShares Core S&P/ASX 200 ETF||0.06|
|MVW||VanEck Vectors Australian Equal Weight ETF||0.09|
|A200||BetaShares Australia 200 ETF||0.04|
Slippage refers to how much you lose by crossing the spread when buying or selling an ETF. It’s calculated by the average percentage difference between the best buyer and seller during market hours.
It has more of an impact if you’re trading an ETF or making regular contributions because you’ll need to cross the spread more often to get invested. STW, VAS and A200 currently have the lowest slippage at 0.04% (four hundredths of one percent).
By comparison the average Australian Equity managed fund offered on the ASX mFunds platform charges a bid/ask spread of 0.55% which is more than 10x more than STW, VAS or A200! ETFs have much lower slippage than most active funds which means investors aren’t starting behind the 8 ball when they invest.
|ASX code||ETF name||Daily Transacted Value ($)|
|STW||SPDR S&P/ASX 200 ETF||9,705,120|
|VAS||Vanguard Australian Shares Index ETF||15,752,478|
|IOZ||iShares Core S&P/ASX 200 ETF||3,761,043|
|MVW||VanEck Vectors Australian Equal Weight ETF||2,402,035|
|A200||BetaShares Australia 200 ETF||7,908,919|
Liquidity refers to the amount of turnover (or available turnover) in an ETF. We measure it by average daily volume on the ASX. Volume is a measure of market making activity and trading interest which makes it a reasonable estimate of liquidity.
It’s worth mentioning that it may not reflect liquidity in the underlying stocks which is typically much deeper for broad Australian share ETFs. However in times of crisis investors may not be able to rely exclusively on market makers for liquidity so daily volume is a relevant figure.
VAS has the highest liquidity with over $15 million of traded value per day in March 2019. STW and A200 are next followed by IOZ and MVW.
|ASX code||ETF name||3 Year Total Return p.a.|
|STW||SPDR S&P/ASX 200 ETF||11.26%|
|VAS||Vanguard Australian Shares Index ETF||11.32%|
|IOZ||iShares Core S&P/ASX 200 ETF||11.35%|
|MVW||VanEck Vectors Australian Equal Weight ETF||12.09%|
|A200||BetaShares Australia 200 ETF||–|
Total return to 1 April 2019
The 3 largest ETFs all generated similar returns over the last 3 years with STW the lowest at 11.26% p.a. and IOZ the highest at 11.35%. A200 recently listed so doesn’t have 3 years of performance yet.
MVW produced an extra 0.75% of performance over 3 years, stemming from its index composition. Where STW, VAS, IOZ are market-size weighted indices, MVW is an equal-weight index. This leads MVW to take weight out of the largest 10-15 shares and spread it across smaller companies.
Over the last 3 years smaller companies have generally done better than the largest companies which were held back by Telstra and the banks. MVW has an 18.34% allocation to 15 MSCI Australian Small Cap index shares whereas market-size weighted S&P ASX/300 index only has a 3.32% allocation to these 15 shares.
The performance of these smaller shares relative to the largest companies is a key driver of differences between MVW and market-size based ETFs. Over a 12 month period, MVW has underperformed VAS, STW and IOZ due to smaller companies underperforming over the last year.
The longer a track record of an ETF and the index it mirrors, the better understanding you have of how an index reacts to different market conditions as well as how closely the ETF is tracking its index.
Most of the broad Australian share indices like the S&P ASX/200 and S&P ASX/300 have existed for some time so you can see how they performed through boom times like 2003-2007 as well as periods of market stress like 2008.
Also important is the ‘tracking error’ which measures how well an ETF has done at mirroring its index. For example over the last 3 years VAS has generated 11.32% p.a. in returns compared to the benchmark (S&P ASX/300) which has delivered 11.39% p.a.
Tracking error is rarely zero because there are various factors that prevent an ETF from perfectly mirroring its index including fees. In the case of VAS, the difference roughly equals its fees (0.14%), which means it’s doing its job right.
BetaShares’ A200 fund tracks the newly created Solactive Australia 200 Index. It will take some time not only to see how the index performs, but also how closely A200 tracks the index.
|ASX code||ETF name||Index history|
|STW||SPDR S&P/ASX 200 ETF||18 years|
|VAS||Vanguard Australian Shares Index ETF||18 years|
|IOZ||iShares Core S&P/ASX 200 ETF||18 years|
|MVW||VanEck Vectors Australian Equal Weight ETF||15 years|
|A200||BetaShares Australia 200 ETF||<1 year|
Since 2014 we’ve invested on behalf of our clients into the Vanguard Australian Shares Index ETF (VAS).
What we originally liked about this fund was its low costs (0.14% p.a.) and that Vanguard has a consistent track record of lowering its fees, not just in response to competitors, but simply because it can.
We continue to favour VAS for a few reasons:
VAS’ low expense ratio (0.14% p.a.) and global track record of reducing costs. By comparison, the largest Australian share ETF (STW) waited 7 years before it lowered its costs from 0.29% to 0.19% in December 2015. Based on their recent growth rates, we expect VAS to overtake STW as the largest Australian share ETF in 2019.
VAS’s broader ASX/300 exposure compared to STW and IOZ which track the ASX/200
VAS’ large size ($3.5 billion) and liquidity ($15.7m per day)
VAS’ low tracking error and slippage (0.004%)
VAS’ consistent return history and the 18 year track record of the S&P ASX/300 index
While MVW has had a period of good relative performance, we aren’t compelled by the equal-weight strategy or other non-market cap weighted strategies for reasons we explained in ‘Should you buy into smart beta ETFs?‘.
Where our clients want more exposure to smaller shares we recommend adding a pure small cap tilt using the Vanguard MSCI Australian Small Companies Index ETF (VSO) as a Stockspot Theme. The VSO fund charges 0.30% p.a. and returned 11.74% p.a. over the 3 years to 1 April 2019.
BetaShares’ recently launched A200 is one to watch. If it can quickly grow assets to become commercially sustainable while also increasing fund liquidity and building a performance track record, it will become an attractive Australian share ETF option.
For now we continue to be confident in recommending VAS to our clients due to its size, commercial viability, liquidity and track record.
As a final note it’s great to see the original Australian share ETF (STW) as well as global ETF giants (VAS and IOZ), different index strategies (MVW) and local disruptors (A200) all have broad Australian share ETFs available.
The Australian ETF ecosystem continues to grow at a rapid pace which is fantastic news for investors.
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This article was originally published in July 2018 and has been republished with up to date information.
Main image: Sam Wermut on Unsplash