If You Can’t Beat Them, Join Them


The default strategy for many is to try and beat the market. And let’s be honest, that’s the reason you stumbled across this blog. You’re looking for any edge, inspiration or maybe even an inside tip to beat the market in your quest for bulk quick gains. I do it as well. But for me it makes up a smaller proportion of my portfolio than it used to.

Many novice investors attempt to offset the risky more speculative stocks with blue chip stocks. But the nature of these same investors is that they don’t have the capital to truly diversify their portfolio. Investing in Telstra as your safety net might make sense. But it is still heavily exposed to just one industry, one company. Ideally you want a holding in a range of companies, across a range of industries to mitigate the risk of the market.

But as stated above, you probably don’t have the capital to do it in a cost effective way. With brokerage fees involved it makes it quite difficult. With that in mind my strategy involves introducing EFTs and Index Funds into my portfolio to replace my ‘Blue Chips’. These sorts of funds are a great addition to one’s individual stock portfolio but also a SMSF. They are geared more towards and investor with at least a 5 year investment horizon.

This article is focussing on the broad based ETFs which operate in Australia. Simply put they carry a range of ASX listed companies which might focus on the top 50 companies or a more broad mix of companies or property trusts. There are other funds which track a sector or commodity, and some with an international focus. We endeavour to discuss more of these options here at the Grey Nomad.

This table below shows a range of ETFs which fit the Australian broad based funds trading on the ASX. I will highlight a few of these below.

Exchange Traded Fund ASX Code Benchmark MER%
Unfortunately, we could not get stock quote ASX:ZOZI this time. ZOZI S&P/ASX 100 Index 0.24
Unfortunately, we could not get stock quote ASX:QOZ this time. QOZ FTSE RAFI Australia 200 0.30
Unfortunately, we could not get stock quote ASX:IOZ this time. IOZ MSCI Australia 200 0.19
Unfortunately, we could not get stock quote ASX:ILC this time. ILC S&P/ASX 20 0.24
Unfortunately, we could not get stock quote ASX:ISO this time. ISO S&P/ASX Small Ordinaries 0.55
Unfortunately, we could not get stock quote ASX:MVW this time. MVW Market Vectors Australia Equal Weight Index 0.35
Unfortunately, we could not get stock quote ASX:MVS this time. MVS Market Vectors Australia Small-Cap Dividend Payers Index 0.49
Unfortunately, we could not get stock quote ASX:STW this time. STW S&P/ASX 200 0.28
Unfortunately, we could not get stock quote ASX:SFY this time. SFY S&P/ASX 50 0.28
Unfortunately, we could not get stock quote ASX:SSO this time. SSO S&P/ASX Small Ordinaries 0.50
Unfortunately, we could not get stock quote ASX:UBA this time. UBA MSCI Australia ex Tobacco ex Controversial Weapons Index 0.17
Unfortunately, we could not get stock quote ASX:VAS this time. VAS S&P/ASX 300 0.15
Unfortunately, we could not get stock quote ASX:VLC this time. VLC MSCI Large Cap Index 0.20
Unfortunately, we could not get stock quote ASX:VSO this time. VSO MSCI Small Cap Index 0.30

 

First off let’s have a look at VAS (Vanguard Australian Shares Index) which tracks the biggest 300 companies trading on the ASX. At any one time they will have a holding in 290 to 300 companies which creates a diversified risk portfolio and gives the investor a taste of all the blue chips and some emerging companies all at the same time. Management fees are the lowest of all those listed above (mainly as there is no real science or magic formula) which makes it attractive to the average punter.

While Vanguard has a number of products on the market, this particular stock has been trading for about 9 years. Since its inception it has delivered returns which average out at 9.12% (4.47% distributions and 4.65% growth) assuming that distributions are reinvested back into the stock. They are solid returns. As it tracks the market this fund has copped it over the past few months which represents an opportunity to buy in. Closing last week at $64.23 is well down from its peak in May of $76.84 (16% discount).

The iShares ILC, which tracks the ASX20 is another which has suffered in recent times. The key difference here is that the exposure is higher. There is only 20 companies, and by the nature of the ASX the financial companies feature quite prominently (nearly 60% of the fund). Further still 45% is dedicated to the big four banks. Despite this the fund has delivered strong returns. Over a three year period they have recorded 15.88% return after management fees presuming reinvestment of distributions.

It is worth noting that the track record is probably not long enough to assume those sorts of gains are sustainable. The recent volatility of the big four banks has had an impact on the price recently with the fund closing last week at $22.42, a discount of 18% from prices recorded in March this year. With management fees of 0.24% it is comparatively lower than other funds listed below, and currently priced to buy.

For those avid readers of the Green Thumb Investor this is one especially for you. UBS IQ MSCI Australia Ethical ETF (ASX:UBA) listed on the ASX in February this year so has little past performance to review. It does however give exposure to 70 companies in a single stock, while avoiding companies which engage in the tobacco industry and those engaged in the production of cluster bombs, landmines, chemical and biological weapons and depleted uranium weapons.

As there is a bit more research involved the fund has management fee of 0.17% making it still very competitive with the other operators in the above list. While the fund avoids some of those nasty companies it still invests heavily in mining giant’s Woodside and BHP which to some might reduce the warm fuzzy feeling. It closed last week trading at $17.44 a 14% discount from its April high. This is an opportunity to get broad exposure to the market while avoiding some unethical players, but with a limited track record I will be holding off for now.

My next post here will look at demonstrating the opportunity in investing in the above. While the gains might lack the explosive speculative we all know and love, the risk profile is moderate and long term appeal is high. Stay tuned from my next update and if you have any questions, once again feel free to reach out!