The price discounting war every Aussie investor should know about

In these inflation-ravaged times, it feels like the cost of everything is heading in just one direction: up.

So, it’s notable indeed when the cost of something starts going down, particularly when the savings involved could amount to thousands of dollars – if not tens of thousands – for some Australians.

Investing in an ETF is like buying a pre-mixed salad of Australia’s share market heavyweights.Credit: Dionne Gain

Over the past week, a fierce war has erupted between rival fund managers vying for a share of your savings (if you’ve got any left, of course).

Last Monday, the world’s biggest asset manager, Blackrock, declared it was slashing the annual fee on its flagship Australian indexed share investment offering (ticker code IOZ) to just 0.05 per cent, down from 0.09 per cent.

Not to be outdone, local funds manager, Betashares, quickly moved to defend its position as the lowest-cost Aussie shares index option on the market (ticker code A200), slashing its annual fee to just 0.04 per cent, from 0.07 per cent.

Compare that to the whopping annual fee being charged by Australian super funds and other managed funds of about 1 per cent or more. Ouch.

Sure, those funds are typically ‘actively’ managed, meaning you get a team of men (yes, still mostly men) playing with your money to try to ‘beat the market’ (something they have proven incapable of doing over the long term, but still).

Amid this price war, it is surely going to get harder and harder for those money men to justify their fees.

The skirmish is also a boon for the increasing number of Australians – including me – who have been directly investing their non-retirement savings into these investments, known as ‘ETFs’.

As returns on bank deposits and online savings accounts tumbled to almost zero per cent during COVID, savers were forced to move up the risk spectrum to try to secure a return on our hard-earned. Many of us discovered share market investing for the first time. And for many, the obvious choice was low-cost ETFs or ‘exchange-traded funds’ like the IOZ and A200 options discounted this week.

Buying into these funds gives you instant diversification across 200 or 300 of the top companies in Australia. It’s like buying a pre-mixed salad of Australia’s share market heavyweights.

So, what exactly is an ETF, and should you invest in one?

Clearly, I can’t answer the second part of that question: you should seek independent advice as to the most tax-effective investment strategy to fit your individual goals and objectives. But as for the second part of the question, here goes.

An ETF is part of a family of potential investments known as ‘pooled investment funds’.

Basically, you pool your money together with other investors, handing it over to a fund manager who then invests it on your behalf and issues you ‘units’ in their fund. These funds can invest in all manner of underlying assets such as shares, bonds, cash commodities or property. For this article, I’ll just focus on shares.

These pooled funds can be ‘actively’ managed – meaning your fund manager tries to choose shares that they think will outperform the market – or ‘passively’ managed, meaning the manager simply attempts to track the returns of a broader index, such as the ASX200.

The returns you can hope to enjoy include a share of any dividends paid by companies in which you are now a part-owner (called a ‘distribution’, usually paid quarterly), plus any capital gain in the value of the units of the fund resulting from gains in the value of the underlying shares.

Now, when it comes to ETFs the crucial distinctive feature that distinguishes them from other types of pooled investment funds is the way they are accessed.

In the olden days, most funds were ‘closed’ funds, with a set number of units available to buy or only admitting new investors every so often. They also usually had large minimum entry requirements (ie you needed $10,000 to invest) and also potentially lengthy waiting periods to get your money out.

Enter the idea of an ‘exchange traded’ fund. This simply refers to the fact that ETF units can be traded – bought and sold – via a share market exchange, such as the Australian Securities Exchange or the New York Stock Exchange.

Such schemes are ‘open ended’ in that any number of investors can buy shares – or sell them – at any time (when markets are open, of course!) and the fund manager can just expand or contract its ownership of underlying assets to match.

ETFs arrived in Australia about 20 years ago now and have been growing in popularity thanks not only to this open-ended nature and relatively lower fees, but also the low minimum entry amounts required (you can invest with as little as around $100) and ease of buy-in (you just need to know the three letter ‘ticker code’ for your ETF and you buy them through a broker like any other share).

Be careful though, as today’s ETFs ain’t necessarily the ETFs they once were. When they first arrived in Australia as an option for Australians to invest in, ETFs were largely ‘index-tracking’, meaning they simply tracked the returns of a broad index. But today they can be actively managed and also invest in higher risk strategies, and the fees can approach those of unlisted funds.

As for the original indexed ETFs, there are three main ETFs that track the broad returns of the Aussie sharemarket: IOZ, A200 and VAS (the latter run by Vanguard and, at the time of print, still charging an annual fee of 0.10 per cent).

In one trade, buying into these funds gives you instant diversification across 200 or 300 of the top companies in Australia. It’s like buying a pre-mixed salad of Australia’s share market heavyweights.

To see the impact of the lower fees, take the example of $20,000 invested for three decades and enjoying an annual investment return of 7 per cent.

If you invested your money in a managed fund charging a fee of 1 per cent a year, after 30 years – with no extra contributions, all earnings reinvested and not taking tax into account – you could expect your investment to be worth just shy of $113,000, with total fees paid of $39,000.

With a management fee of just 0.04 per cent, your money grows to over $150,000, with total fees paid of just $1800.

That’s a significant amount of extra money in your pocket, and the reason every Aussie investor should at least know what an ETF is.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Jessica Irvine is author of Money with Jess: Your Ultimate Guide to Household Budgeting. You can follow more of Jess’ money adventures on Instagram @moneywithjess and sign up to receive her weekly email newsletter.