As featured in the Herald Sun – Friday 2nd December 2016.
By Gary Stone – Author of Blueprint to Wealth: Financial Freedom in 15 Minutes a Week & the Founder of Share Wealth Systems
Last week I made the case for Australian investors to seriously consider index ETFs (Exchange Traded Funds) for long-term growth investing, such as Super. Indeed, many (grand)parents over the years have bought shares in individual listed companies for their (grand)children to start building a nest egg. Especially around Christmas time.
Index ETFs are the perfect gift for multi-decade growth gifting. Why? Because they track the mainstream stock market benchmark indices and hence always invest in the largest most well-known companies listed on the Australian stock exchange. Index ETFs are, therefore, biased to being invested in companies that survive and thrive, whichever they may be, both now and many years into the future.
Individuals trying to pick one or a few stocks that will continue to perform over the long-term is a very difficult gig. Even the most well-researched investment professionals the world over have remained invested in well-known large companies as they failed, delisted and lost all their value. However, a stock market index can’t fail and go to a value of zero, because falling constituents are removed from the index before they completely fail, and are replaced with another growing company.
There are four index ETFs listed on the Australian stock exchange that track the mainstream Australian stock market indices. Their ASX codes are ILC, SFY, STW and VAS. They respectively track the ASX20, ASX50, ASX200 and ASX300 mainstream Australian stock market indices. There are others, but that’s for another time.
These four index ETFs are managed by iShares, State Street and Vanguard, all huge financial institutions. iShares has ETF Assets under Management (AuM) of over $1 trillion. State Street has AuM over $2.4 trillion and Vanguard AuM over $3.5 trillion. These companies are many multiples larger than nearly all those that manage Super funds in Australia.
But size is not the most important factor, it is performance that matters. Research by S&P Dow Jones Indices in their SPIVA ScoreCard shows that mainstream stock market indices, with dividends reinvested, beat nearly every managed fund, Super or otherwise, over the long term. And hence so do index ETFs, which have much lower annual management fees than all Super funds and managed funds.
Index ETFs pay dividends which are typically around 70% franked. Franking, which is additional tax returned to the shareholder that was deducted from their original dividend, further adds to investors’ long-term returns.
So, you have a simple growth investing vehicle that won’t fail, grows by more than nearly every other investing vehicle over the long term, can be started with a few hundred dollars, has amongst the lowest entry and ongoing management fees, can easily be added to, and automatically gifts dividends and franking credits every year (which should be reinvested to achieve more growth).
Your (grand)kids will be eternally grateful someday. Maybe for a deposit on their home. And will learn a lot about investing along the way. What a gift!
On the journey…
Author of Blueprint to Wealth: Financial Freedom in 15 Minutes a Week www.blueprinttowealth.com/
Check out Gary’s other media appearances: https://www.blueprinttowealth.com/