The future of lower-cost investments

Robin Bowerman, Head of Retail at Vanguard Investments Australia.
Robin Bowerman, Head of Retail at Vanguard Investments Australia.

PERSONAL finance journalist Annette Sampson provides a telling insight into retail investment opportunities in her latest column, “A super chance to snap up a cheaper deal”, (, May 22, 2010) by saying retail investors can generally find an expensive way and a cheap way of investing.

“Just about any investment you can think of has cheap and more expensive alternatives,” Sampson writes in the Fairfax publication.

“Want to buy a managed portfolio of shares? Well, you could go for an index fund or Exchange Traded Fund with fees well under the 1 per cent mark,” she says, “or you might prefer an active fund that gives similar performance for an annual fee of 2 per cent or more.”

Sampson then moves on to discuss her expectations that the popularity of lower-cost investments will markedly grow with the Federal Government’s proposal to ban financial advisers from charging commissions to retail  investors from July 2012.

In her piece, Sampson particularly highlights how Exchange Traded Funds (ETFs) will be among the likely beneficiaries of a no-commission world.

“ETFs are a major growth investment overseas though still in their early days in the Australian market,” she writes. But with no entry or exit fees, ETFs provided a low-cost way for investors to obtain wide exposure to shares and other assets.

As Smart Investing has often discussed, the annual growth in the total market capitalisation of ETFs listed on the Australian market is remarkable – rising 134 per cent in the 12 months to April 30 to reach $3.4 billion, according to the ASX. This percentage increase is, of course, still from a relatively low base.

In the US market, for instance – where ETFs have been established for far longer – the funds are among the most-traded stocks.

A recent feature in The New York Times by journalist Conrad de Aenlle notes that both conventional unlisted index funds and ETFs have enjoyed strong investment inflows in the US over recent years.

“The trends indicate a broadening realisation that the lower costs of running and owning both kinds of funds give them an edge in performance that’s hard to overcome over the long term,” de Aenlle writes.

“Index fund mangers have no research to conduct or buy, make no visits to companies and trade relatively few securities. ETFs have additional cost advantages.”

And he quotes Scott Burns, director of ETF analysis at investment researchers Morningstar in the US as saying: “What you’re seeing is more advisers embracing lower-cost asset-asset allocation strategies and embracing ETFs. They’re throwing up their hands and saying, ‘I don’t want to beat the index; I want the index.’”

This is a reflection of the lower-cost future of investment products.

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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.

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