I Need A Weapon – The great A200/IOZ/VAS debate

If you spend more than 10 seconds on the subreddit for FIRE in Australia you will see some sort of discussion on the merits of investing in A200 or IOZ or VAS, focussing in particular on the fees.  The current MERs for these are 0.07%, 0.09% and 0.10% which doesn’t sound like a huge difference. 

As regular readers of this blog would know, I’m a numbers kinda guy so I wanted to do the math to see what difference this would make over the long term. 

Read on to see the results!

Disclaimer

Quick disclaimer:  As is always the case you should not plan your finances around what some random person on the internet says. Everything which is written here is of a general nature at most and is certainly not specific professional advice for you and you should not be relying on it when making decisions. I am not recommending any of these products, and yes I do own some of the products discussed here. 

Whilst every endeavour is made to provide accurate information at the time of writing you should be talking to a licensed professional about any specific areas of your finances, taxes etc.  Also, it’s going to be really embarrassing if it all goes pear shaped and you have to explain that your finances blew up because you read about something from a random blogger.  Moving on!

The ETFs and Indexes

The performance of the various indexes and thus the ETFs that track them is extremely likely to be very similar.  The S&P/ASX 200 (IOZ and STW) is the main index for professional investors in Australia, and as the name suggest includes (roughly) the 200 biggest companies weighted by market capitalisation.

The S&P/ASX 300 (VAS) is another (roughly) 100 companies on top of the other 200, but those extra 100 companies only make up (and I’m approximating here) about 3% of the larger index.  The two indexes had very similar performance over the last 10 years which is what you’d expect given how similar they are, with the S&P/ASX 200 doing slightly better than the S&P/ASX 300.

The A200 from Betashares tracks an index called the Solactive Australia 200 Index. A cynical person (like me!) would assume this is a way for Betashares to be able to track an index which is exactly or almost exactly the same as the better known S&P/ASX 200, but not have to pay the more expensive licensing fees to S&P Dow Jones who license the other indexes.  In any case it’s likely to get you more or less the same performance as the S&P/ASX 200, because that’s what it is designed to do.

So all three indexes are likely to give you very similar performance, and if there is going to be any divergence in performance you have no way of knowing which way it will go so there’s not much point in worrying about it too much.

Assumptions

Obviously when you’re running calculations on this you have to make some assumptions so you have numbers to plug in. 

Plucking some numbers out of the air, I’ve gone with a smooth return of 7% for the lowest cost provider with $30,000 being invested each and every year for 20 years.  Yes, I know that this is not how things work in the real world as I’ve talked about numerous times, but this gives us something to work with at least. 

For each of the ETFs I’ve assumed that they have received exactly the same performance except for the difference from the MER costs.  Because they track slightly different indexes this probably won’t be exactly the caseas I mentioned above, but given I have no idea how it will play out in the future this seemed to be the most logical way of running the calculation, and as I said above the differences are likely to be very small.

I’ve also run the numbers on STW which is the other large Australian equities ETF. Yes I know that nobody in the FIRE community actually invests in STW (or has even heard of it), but I personally have a largish holding for historical reasons so it’s useful for me at least.  Lastly I’ve put in a theoretical actively managed fund which underperforms the lowest cost provider by 1% exactly. 

Obviously this also assumes that the fees (or at least the fee differential) remains constant on all of these products over time.  This is likely not going to be the case as I’ll discuss later, but it’s obviously impossible to know how these things will change in the future.

Also, it’s kind of assumed that whichever product you’ve chosen is the only one that you’re invested in.  I personally would not be doing this as per this earlier post and don’t think you should either, but it’s a (mostly) free country.

Update

Since I first wrote this post State Street have announced that they will be dropping the fee on STW from 0.19% to 0.13%. I’m not going to update the figures in the article because it helps make a number of my points, but if you want to have a rough idea of what the new difference is between A200 and STW then you can more or less just double the difference between VAS and A200. It’s not exact obviously, but it’s near enough.

So how much do you end up with?

After this enthralling buildup I know that you’re dying to find out the results, so here they are!

Huh.  So the results are umm, kinda underwhelming given the amount of time that is spent talking about this stuff. 

By having IOZ or VAS instead of A200 you end up with a portfolio worth $1,227,182.24 or $1,225,843.47 instead of $1,229,864.77.  This is a difference of roughly $2.5k or $4k.

Look, three or four thousand dollars isn’t nothing.  But I’m going to guess that when you have about 1.2 mill of them you’re going to be slightly less worried about it than you might be currently, given it represents a difference of about 0.22% to 0.33% of your investments. 

This is well within the percentage that the stock market fluctuates daily, so from one day to the next you could be up or down by that amount anyway.  My portfolio is normally up or down by $4k at least a couple of times per month already, this will only increase as it continues to grow in size.

Honestly at this point you can just stop reading if you want, cause that’s the big news right there.  The entire debate is basically a waste of everyone’s time because it will make essentially zero difference to your life or your net worth.  I mean I’m going to keep writing for a while because I like to over analyse everything and then write about it, but you can stop reading right here if you want, I certainly won’t blame you.

If you’re still here and you’re wondering how much longer you’d have to work/wait for your IOZ/VAS portfolio to grow in size to the A200 level, it’s between 1 and 2 weeks.  I doubt you’re going to care.

Even if you went with STW instead of A200, the difference is 15 grand over those 20 years.  Yes, a grand don’t come for free, and certainly 15 of them don’t, but it’s basically the equivalent of another month and a half of working and waiting.  Not nothing, but not the end of the world either.

The real win is in not being in the more expensive managed fund which underperformed by 1% a year, and means you end up with $123k less than you would have otherwise.  This basically means about another year of working to hit your FIRE number.

If you want to look at what it means over a 40 year working career then here are the figures below. 

Again, it’s not nothing but if you’re honestly worried about whether you have $30k less or even $180k less when you have $5.8 mill then look, I dunno what to tell you. Avoid the fund which underperforms by 1% is the big takeaway here, althought even then you have $4.5 mill so you might not care that much.

What’s my income though?

The important thing for most of us though is not what amount of money you end up with, but what your annual income will be, which I’ve shown below.

Again, for the first two at least it really isn’t that much of a difference.  A hundred to a hundred and sixty dollars difference per year for IOZ and VAS isn’t nothing, but it isn’t anything huge either.  Zzzzz.  Six hundred bucks for STW is a bit more but again probably not making any major difference to your life.

The real win is again in not being in the more expensive fund which underperformed by 1% versus the index and would mean about five grand a year less in income.  That’s real money there, and could easily pay for a nice holiday or a pretty good meal out every week.

What about the fees?

Personally I have no problem whatsoever with paying money so long as I’m getting plenty of value for it.  When it comes to investments though, and particularly if you’re just looking at trying to track an index, well that’s now basically a commodity that you can get for pretty close to free through a bunch of the ETFs that I’ve been running the numbers on.

You can see that as you’d expect, the higher the MER the more you are paying in fees. This means of course that you are going to end up with slightly less invested and slightly less income.  The annual fee differential isn’t huge for IOZ and VAS, is a decent whack for STW, and is a huge difference for our actively managed fund.

Obviously you’d like to be paying as little as possible, but once you’ve got it narrowed down to the first three providers there isn’t much of a difference.

Why you shouldn’t spend too much time worrying about which ETF to choose

Obviously it will make some tiny amount of difference as to which ETF you’re in as all of these various tables have shown.  However the differences in end value and the income you get from it really aren’t that big between A200, IOZ and VAS.  Yes you do end up with slightly more invested and in income and with lower fees, but it isn’t a big change and you’ll likely not even notice. 

Having said all that, there are a bunch of other reasons why you shouldn’t care all that much about which one you pick anyway.

First of all, fees aren’t going to be the same forever and a day.  In the last year or two fees for most of these products were nearly halved.  Most of the providers want to be the lowest cost provider so they get to run more money, or at least close enough to being the lowest cost provider that they don’t get ruled out on the basis of being too expensive.  Although having said that I wish State Street who manage STW would come to the party here! 

Over 20 odd years, plus however long you spend in retirement, chances are pretty good that these product providers are going to continue to lower their fees, and the one that is cheapest now isn’t guaranteed to be the cheapest in 10 years time, or 20 years, or 30 years etc. 

Blackrock (IOZ) and Vanguard (VAS) are huge globally and may well have more scope to lower fees over time vs BetaShares (A200), so don’t count on the fees or fee differential remaining constant, in fact you should expect it to change.

Secondly, new products are going to come along over time.  It’s very easy to forget that a lot of these products haven’t been around for all that long. 

A200 was only established in May 2018, so less than 2 years ago.  If you started your FIRE journey before that, then you couldn’t have invested in it.  IOZ is the next most recent, it began trading in December 2010 so not even 10 years ago. 

VAS was May 2009, it’s nearly 11 years old.  STW is actually the longest running (I own it because it was the only one available for investing in at the time) and it was only available from August 2001.

Currently index ETFs are the cheapest way of investing in the stock market  and BetaShares is the cheapest provider, but there is no guarantee that this will continue.  Maybe some company like Fidelity or the like will come along with a cheaper and better product that will have everyone complaining about the excessive fees that all of the current products charge.

Thirdly, hopefully you have a diversified portfolio and all your eggs are not in the one basket of Aussie equities.  Maybe you have some international shares, maybe you have some bonds or property or whatever else. 

In which case you may well have a fair chunk of your money invested in other assets, and so that $3k or $4k difference in total amount invested becomes $1k or $2k and even less worth worrying about. 

Fourthly, if you are still worried about all of the above you can invest in a couple of different Australian ETFs providers to cover your bases as a number of prominent Aussie bloggers like Aussie Firebug, The FI Explorer or even I have done.  So you’ll never have all your money in the cheapest provider, but you won’t have all your money in the most expensive one either.

There is nothing wrong with changing which product you invest in if it makes sense to do so, in fact I would actively encourage it.  Maybe you can’t change out of whatever you are currently invested in because the CGT would cost you more than it’s worth, but you can certainly put new investments into new products.  Yes there is going to be slightly more admin at tax time, but it’s going to be pretty minimal.

So what are the takeaways?

Firstly, it makes very little difference as to which of the three main Australian equity ETFs you choose. You end up with pretty damn close to the same amount invested, the same amount of income, the same amount of fees.  The big win is in avoiding the more expensive products like STW or an active fund with higher fees for worse performance.

Secondly for a whole bunch of reasons even if you are concerned about those tiny differences you shouldn’t sweat it too much because things will change over time and you may well change how you invest as a result. 

Thirdly, you should spend far less time thinking about this than I already have.  If you’re going to invest in an Aussie equity index ETF then pick one and have done with it until things change in the future.

What are your thoughts on the A200/IOZ/VAS debate?  Has this post changed your mind?  If you enjoyed this post and would like to read more like it please subscribe!