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Best Index Funds in Australia
Index funds are pretty darn similar to exchange-traded funds (ETS). The only real differences come down to a few technicalities that we won’t bore you with in the intro.
Index funds are also a type of mutual fund, which are pools of investment that professional money managers handle behalf of their investors.
Confused yet…? 😵
All you really need to know is this: in the great balance of possible investments via the financial markets, index funds have historically held value across the years. Let’s have a look at some of the top index funds AU.
Table of Contents:
- 📂 Schwab S&P 500
- 📂 Vanguard Australian Shares ETF
- 📂 Fidelity U.S. Sustainability
- 📂 iShares Core S&P/ASX 200
- What are Index Funds
- Index Funds vs. Mutual Funds & ETFs
- How to Trade an Index Fund
How We Choose our Services 📚
Each index fund in this guide is listed on Australia’s Securities Exchange (ASX), which is responsible for regulating trading. It’s Australia’s leading financial exchange, with a market capitalization of around $1.5 billion trillion after being launched in 1987.
The Best Index Funds Australia 📁 – Our Reviews 2022
What really is the best investment? 🌞
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None of this is good for the economy… Which means that your best investment may not be to use the financial markets at all. Consider things that support you and your family – this may be your best investment option:
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1. Schwab S&P 500 – Top Index Fund
The S&P 500 reportedly outperformed the broader market for the majority of the 20th century.
However, as time marches on, so do investors. It isn’t difficult to see why: markets are increasingly volatile, macroeconomic trends and global war have made it less appealing over time, and even the best-run companies occasionally stumble.
That being said, many stock investors will still view the stock market as a safe place to park their money for the long term — at least until better times dawn.
History of Charles Schwab International
We won’t get into the rabbit hole aspect of this – so let’s cover the official narrative on who this investment service is. Over the past few decades, Charles Schwab International (CSW) has evolved from a family-owned investment company into one of the largest providers of financial planning and management services in the world.
In the process, it has grown from a pure-play discount brokerage with a couple dozen offices to a global financial services powerhouse with more than 6,100 locations in more than 70 countries.
What is the Schwab S&P 500 Index Fund?
The Schwab S&P 500 Index is reportedly a mutual fund that follows the S&P 500 stock market index. Like all exchange-traded funds, it does not directly invest in stocks, but rather in a pool of stocks that represents the market as a whole.
The fund’s investment strategy is designed to seek out stocks that are under- or overvalued and are good candidates for investments that will rise over time as inflation and market growth manage to push up real estate values, increasing the value of your investment.
It’s available to investors who purchase shares online at schwab.com. The fund is actually managed by Van Hoof and Associates, Inc., an investment firm with more than 90 years of experience. Investors can choose from 11 different stock pickers, including the Schwab Intelligent Portfolio.
Think of this as a fund that tracks energy. Another word for this is ‘value’. The fund’s investment philosophy is based on value, with around 40% of assets in the fund being dedicated to value stocks. It holds stocks with relatively strong dividend yields, as well as stocks that pay attractive price-to-earnings ratios – with a focus on stable growth potential.
How to Buy
Either a direct purchase through schwab.com or a qualified buy-side fund. A qualified buy-side fund is one that is sponsored by a brokerage firm and meets certain investment criteria, including minimum investment requirements, such as eToro (review).
Investors who buy a direct investment in the S&P 500 Index Fund will reportedly need to invest at least £2,000 in the fund, which will be managed by Van Hoof and Associates, Inc., an investment firm with more than 90 years of experience.
Overall, the S&P 500 has performed well relative to other asset classes, providing investors with exposure to the broadest possible range of market sectors and companies.
- Access on eToro
- Good track-record
- Diverse industries
- Direct investments may come at a high premium
2. Vanguard Australian Shares – Top Index Fund Alternative
What if you want to access high performing Australian companies across a range of indexes?
Explore a number of different investment opportunities, including investment advice, insurance, retirement planning, and more through the ETF vehicle.
The idea is for you to invest in a variety of sectors to gain exposure to a wide variety of stocks. The funds may hold a single index stock or a range of index stocks, depending on the fund’s objectives – tracking indexes like the S&P 500 and the London Stock Exchange.
What is it?
Let’s manage expectations: The Vanguard Australian Shares ETF is one of a number of funds from the investment company subsidiary of The Vanguard Group, Inc. The fund was established in 1999 and is now managed by BPI Investment Management Australia Pty Ltd.
It’s reportedly designed to provide investment professionals and retail investors with a low-cost way to gain exposure to the Australian share market. BPI manages the fund as well as a number of other funds with the objective of providing income to investors and helping them to manage their investment risk.
The Australian share market is the second largest stock market in the world, and its capitalization of $1.4 trillion makes it the fifth most valuable stock market in the world. It’s grown rapidly over the past decade, and as a result, investors have been able to buy shares in many well-known companies at very attractive prices.
However, as with all stock markets around the world, the performance of ETFs invested in the Australian share market varies greatly. Some provide exposure to just a small part of the Australian share market while others cover almost all of it. Given that there are so many ETFs available in this area, it can be difficult for new investors to know which ones to buy and which ones to avoid.
Overall, the Vanguard Australian Shares ETF is a closed-ended fund that invests 80% in the Australian Stock Exchange (ASX) common shares and 20% in the S&P/ farmland Index. The fund is designed to provide exposure to the whole of the Australian share market.
It’s also relatively diversified, with around 36% of its assets invested in ten different asset classes. Generally, funds with the word “shares” in their name are more conservative, but that is not always the case with the Australian Share ETFs – ranging from low- to mid-grade and are actively managed by people with expertise in the shares sector.
- Good amount of exposure to the market without investing too heavily
- Access one of the most important stocks markets in the world
- Reportedly includes the S&P/ farmland Index
- Not technically an index fund
3. Fidelity U.S. Sustainability – Top Index Fund for Energy
Fidelity is one of the world’s largest asset managers, with over $2.1 trillion in assets under management.
The company has also made its position on environmental, social, and governance (ESG) issues known by amending its equity funds to exclude companies that fail its sustainability standards.
A few years back, Fidelity launched 10 U.S. equity or global equity funds focused on sustainable investing themes. The latest of these enhancements is the Fidelity U.S. Sustainability Index Fund (FUSF), which was created from an older Fidelity fund called the New Sustainable Growth Equity Fund (FSGF).
FUSF debuted on Nov. 1, 2018 as a market-cap-weighted fund with a primary focus on sustainable businesses such as renewable energy and green technology companies. Read on to learn more about this fund that promised to remain committed to ESG investing principles while providing exposure to profitable companies focused on sustainability in their operations and supply chains.
This offering is diversified across 15 industries and 61 companies. But how about the motivation behind the fund?
You should be getting a globally accessible equity fund that tracks the FTSE Global Sustainability Index. The fund’s managers are Timothy T. O’Brien, Christopher M. Davis, and David P. Miller. The fund is managed by Fidelity Capital and Research, and has $1.9 billion in assets.
In recent years, Fidelity has focused on bringing ESG investing to the forefront of its mutual fund offerings. While it’s true that investors are increasingly interested in investing in companies that maintain socially conscious business practices, Fidelity has made it known that “sustainability” is more than just environmentally conscious investing.
Fidelity’s Sustainability Research team has created a set of criteria for companies that want to be included in its sustainability index funds, with the added benefit of screening out companies that are most likely to become involved in future litigation. The fund’s managers are committed to sustainability through the entire investment process.
While it’s true that investors are increasingly interested in investing in companies that maintain socially conscious business practices, Fidelity has made it known that “sustainability” is more than just environmentally conscious investing. They use environmental, social, and governance (ESG) screens to identify stocks with sustainable competitive advantages; with full discretion to sell holdings that fail their sustainability screens, which they have done in the past.
Reported key features
- 🗽 A market-cap-weighted fund that provides equity exposure to companies with strong sustainability characteristics.
- Invests in companies across 15 industries, with a focus on emerging and frontier markets.
- 🗿 Low correlation with the rest of the market, providing diversification to a portfolio. The
- Active investment approach to seek out undervalued stocks
- 🌿 Proprietary sustainability model to screen for sustainability characteristics. The fund’s managers may sell any stocks that fail their sustainability screens.
The sustainability index funds are actively managed funds that charge higher expense ratios than passively managed funds. In addition, investors should be aware that Fidelity has full discretion to sell holdings that fail their sustainability screens, which could impact performance.
Lastly, the fund has a low correlation to the market, which is a positive characteristic in many respects, but also theoretically means it will be less able to profit in a bull market.
- Low expense ratio of 0.29%
- Diversified across 15 industries and 61 companies
- Market-cap-weighted fund
- Focused exclusively on energy and sustainability
- There is currently a lot of volatility in this market
4. iShares Core S&P/ASX 200 – Popular Index Funds Choice
iShares funds are managed by BlackRock, who themselves purchased the brand and company from Barclays a few years ago.
BlackRock is currently the world’s biggest assets manager, and also closely involves itself in agendas related to environmental, social and corporate governance (ESG).
While there is a fair amount of controversy, particularly related to their involvement with the business-crushing pandemic, they do have large financial reach including with Chinese investments.
What is the S&P/ASX 200?
The S&P/ASX 200 is a popular gauge for the entire Australian sharemarket. It’s a percentage index that tracks 200 stocks listed on the Australian Stock Exchange. The ASX itself is, of course, the Australian stock market’s principal exchange.
Trading in the ASX is highly regulated, with strict rules and a vast array of tasks for market participants to complete. This can make it difficult for small investors to make an impact on the market.
The S&P/ASX 200 itself is a supposedly growth-friendly index that includes some of the market’s top-performing stocks over the past 12 months.
The index is benchmarked against the S&P 500, the world’s most widely-followed stock exchange index. This index is intended to track the overall state of the economy, but it is also a good gauge for current and prospective industries.
This is because the index weights each company based on its share price, multiplied by the number of shares listed on the exchange. If you bought a stock at $30 and it has performed well, you’ll end up with shares valued at $3 per share. If the share price is lower, you’ll end up with less shares. This system ensures that the index boosts the share price of successful companies while penalising those that are not so great.
One of the reportedly best things about the S&P/ASX 200 is that it’s a heavily weighted index. An overwhelming majority of the index consists of stocks that are doing very well.
This means that the average move of the index is small—typically less than 1%. Therefore, chances are that the stocks listed in the index will go up as well as down over time. Stocks that are performing well for a number of reasons might rise in value, while stocks that are just recovering from a rough patch might fall.
But remember, no matter how well the market goes, it always pays to be cautious. There are always risks when investing. Even in the best case scenario, stocks can go down in a bear market, so take some money off the table when you buy a stock.
Overall, the S&P/ASX 200 is a respected benchmark for the Australian stock market. It’s up almost 10% over the course of three days, meaning investors are loving what they see.
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Best Index Funds – Buying Guide 📊
If you’re going to start with index funds, you may as well understand the benefits and drawbacks of index funds, and how to use them properly. So go on—let’s investigate how they work, in this buying guide section.
What are Index Funds?
Index funds are a type of investment fund that has only one goal: to track the performance of an index.
Each index is any list of stocks (beginner’s guide) that represents an investment objective. Many index funds are simply regular stock indexes like the S&P 500, the London Stock Exchange, or the NASDAQ Composite.
Others track a particular sector, like utilities or telecommunications. But regardless of what sector an index fund invests in (which sectors make up the overall stock market), it will try its best to follow the performance of the entire index.
These types of funds were created as a way to avoid the risks and costs associated with investing in individual securities. Instead, investors buy into ETFs (exchange-traded funds) that hold stocks from various sectors or companies.
These shares give the investor exposure to that specific sector but also have a lower risk than buying individual stocks. In other words, buying an ETF rather than individual stocks provides a higher yield — meaning more profit for investors — as compared to investing in individual securities such as raw materials, energy, or banks.
Index versus Mutuals & ETFs
Index funds are a subset of mutual funds. Because diversification is the name of the game when investing, it makes sense to follow the funds that provide the most protection against the loss of even a single percentage point.
With index funds, you’re purchasing a guaranteed, single-digit-per-year portfolio of stocks. And as an index fund investor, you get the added benefit of access to less expensive index funds compared to mutual funds because index funds are purchased in bulk. Moreover, you don’t have to pay management fees for the privilege of owning an index fund.
The most important reason to purchase an index fund instead of a mutual fund is that they are much less expensive. Index funds have a low annual expense ratio, which is one percentage point less than the typical mutual fund expense ratio.
Exchange-traded funds (ETFs) are similar to index funds in that they track market indexes, but there are some key differences between them. ETFs trade like stocks on stock exchanges, just like individual stocks do. Some ETFs are leveraged — meaning they are designed to multiply gains or losses — while others move in relation to a particular index or commodity price.
How to Trade an Index Fund
If you decide you want to sell an index fund, you have a couple of options.
First, you can try to sell it at its current price and get back as much as you invested. Or you can try to sell it at a higher price and get a lower amount.
The first option is called a “sell-off” and typically signals that investors are concerned about the fund’s performance. The second option is called a “sell list,” and this is when you try to get as much as you paid for the fund back.
Generally, people hold onto index funds for a number of years, and they don’t sell them every day. This is because the value of an index fund tends to fluctuate very little over time. Some investors may choose to sell an index fund if they need the money, but this is a rare occurrence. If you do decide to sell, you can sell your holdings one at a time or in bulk.
How you can lose money with index funds
Index funds are not all rainbows and lollipops, but there are some pitfalls that non-professional investors should be aware of before buying into one. The biggest risk of investing in an index fund is that it will underperform the market.
This means that it won’t keep pace with the overall market or provide you with the same return that you could have gotten somewhere else. For example, if you invested in a stock market index fund and held on for five years, then found out that it only gained 2 percent annually while the S&P 500 gained 10 percent annually over the same period of time, then clearly your investment didn’t perform as well as it could have.
The other risk associated with investing in an index fund is that you won’t be able to buy and sell at will because there may not be enough liquidity (the ease with which people can buy and sell things). There isn’t much liquidity for some ETFs either since they don’t trade as often as stocks do. So be sure to check out the fund’s liquidity before you buy.
You also have to be careful about the fees involved with investing in an index fund. Sometimes mutual fund companies will charge a fee for managing your money, which can significantly eat away at your returns. Fees can run anywhere from 0.2% per year to more than 2%. This means that if you invest a large amount, then the fees could really add up and eat into your profits.
Why Does Market Capitalisation Matter?
One way exchanges evaluate the size of a company is by looking at its ‘market capitalization’ — the total value of all the outstanding shares of a company’s common stock. This figure is determined by multiplying the number of shares outstanding by the current market price per share.
For example, if XYZ Company has 1 million shares outstanding and its stock price is $10 per share, then it has a market capitalization of $10 million (10 × 1 million). So if this same company earns a billion in profits from selling products worldwide and pays out $800 million in dividends annually over four years.
Which means it would have paid out 3.2 billion in dividends (800 million × 4). This fluid system of numbers makes up listings on the various indices. Currently, there is a lot of doubt about how valuable some of these top companies, like Tesla, really are.
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