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Regular reader Benjamin writes:

Myself and my partner are starting to invest in ETF’s.

What a great idea Benjamin!

What we can’t work out is how to keep adding to our purchased shares on a regular basis without paying a lot in broker fees?

We started with a $10,000 investment via NABtrade and set up dividend reinvestment, but we also want to set aside say $200 a fortnight from our pay for further investment.

Can you invest extra every fortnight or does that incur the brokerage fee every time?

First of all, good on ya Benjamin for diving in and getting started with Australian ETF Investing. This will be one of the best decisions you have made in terms of securing your financial future for you and your partner.

I see you already have $10,000 invested in ETF’s of your choice which is a great amount for a first investment – well done!

You know the process of buying and selling ETFs through a broker and you have figured out how to enroll in the dividend reinvestment plan!

Minimising Broker Fees

There are two ways to minimise fees when buying ETF’s:

• Enrol in the Dividend Reinvestment Program so that the ETF provider will reinvest your dividends and buy more shares for you for free
• Save up a large chunk of dollars before buying your next set of ETF shares because the more you invest the less you pay in broker fees

Benjamin already the first strategy under control so let’s talk about the second strategy.

Minimising Fees with NABTrade

Here are the fees that NABTrade charges for buying and selling ETFs.

• $14.95 on trades up to $5,000
• $19.95 on trades between $5,000.01 and $20,000
• 0.11% of trade value on trade above $20,000.01

Let’s look at these fees in % terms of different investment amounts.

• Trade size = $200. Broker costs = $14.95/$200 = 7.48%
• Trade size = $1,000. Broker costs = $14.95/$1,000 = 1.50%
• Trade size = $5,000. Broker costs = $14.95/$5,000 = 0.30%
• Trade size = $10,000. Broker costs = $19.95/$10,000 = 0.20%
• Trade size = $20,000. Broker costs = $19.95/$20,000 = 0.10%

If you are making trades valued above $20,000 then the calculations changes to be a fixed per cent of the amount invested.

• Trade size = $50,000. Broker costs = 0.11% * $50,000 = $55

Analysing these numbers you can see that it doesn’t make much sense to buy regular packages of $200 worth of shares. If you do that NAB will charge you $14.95 for each trade. That works out to be 7.48% of the amount you are investing!

You need to be earning a big return from your ETFs to overcome the brokerage costs here. A better strategy is to buy less frequently but in larger amounts.

If you can manage the amount you are investing you can even take advantage of sweet spots to minimise fees paid.

For example, it doesn’t make sense to buy $5,001 worth of shares and pay $19.95 when you could buy $4,999 worth of shares and pay only $14.95.

You should pay attention to these sweet spots because each broker has different thresholds where costs begin to increase.

Do you know your broker’s thresholds?

How often should I invest to minimise fees?

How regularly you should invest depends very much on how much you earn and how much you save each week.

Benjamin says and his partner are saving $200 per fortnight ($100 per week).

The first investment sweet spot with NABTrade is $5,000 . For any and all trades made that are worth less than $5,000 NAB will charge you $14.95. It doesn’t matter if you want to buy $200 worth of shares or $2,000. That will be $14.95 thanks!

To maximise the bang for your buck and minimise fees you want to save up as close to $5,000 as possible before buying an ETF and hit that sweet spot.

At $100 week this means that Benjamin should be buying an ETF once per year in order to minimise fees paid to NAB.

Let me anticipate your next question Benjamin

But what do I do with the $100 I am saving each week if I can only buy an ETF once per year?

You put it in your High Interest Savings Account Benjamin. And don’t be tempted to touch it throughout the year. Remember you are for your financial future – so show some restraint!

Got a question you want ETF Bloke to answer? Drop me a line

Susie – who is clearly not here to fuck spiders – asks:

What kind of portfolio returns are you averaging with your investment mix?

I like a woman who is straight to the point.

And with the follow up:

Are you independent of Vanguard?

Let me address the second question first because it’s a piece of cake.

Vanguard Independence

I am completely, hopelessly, 100% independent of Vanguard and all other ETF providers.

Consider me the Solo Man of Australian Finance.

I write as ETF Bloke because I love youse all, not because Vanguard (or anyone else) is putting me up to it.

I write to help educate other Aussies about ETF’s and hopefully give people a few tips that they can use to better their financial futures.

The About and ETF Bloke’s Portfolio pages give some hints as to my background and motivations so have a read to satisfy your curiosity.

But remember at the end of the day I am just a normal bloke and none of what I say on here constitutes financial advice. You should consider getting independent advice that is specific to your personal situation.

ETF Bloke’s Portfolio Returns

Alright Suze, I’ll show you mine if you show me yours.

Portfolio returns since inception are 11.61% for the ETF Bloke portfolio.

Returns are real after taking into account management fees. ETF fees are reflected in the price that each ETF trades at on the market. You don’t have to do any fancy calculations to figure out your returns less management fees.

Below is how the portfolio looks in Sharesight, which is a program I use to track my total returns. Sensitive information has been removed of course!

And to my earlier point on independence, I don’t just hold Vanguard ETF’s in the portfolio. I also have one ETF from BetaShares and one ETF from iShares.

Most of the return has been from Capital Gains rather than Dividends. This is because the ETF Bloke portfolio is comprised of mostly international stocks and bonds.

International stocks tend to focus on capital gains due to tax advantages, whereas in Australia we focus on dividends (also due to tax advantages!)

When broken down into individual holdings the returns look like:

• VGS – Global Shares – 13.16%
• VAS – Aussie Shares – 11.17%
• IJR – US Small Cap – 9.98%
• VAF – Aussie Bonds – 7.31%
• VBND – Global Bonds – 5.56%
• VGE – Emerging Markets – 4.10%
• AAA – Cash – 1.91%

This ETF investing stuff goes alright.

OK I’m done, now it’s your turn Suze.

You know where to contact me.

Today comes a question from one of our readers Matty.

Hi ETF Bloke. Thank you for making such an easy to understand resource for someone like myself who is new to ETF’s

Yeah no worries Matty, happy to help.

My question is: is there a good ETF equivalent to VTS that is domiciled in Australia? I am looking for pure American exposure without any international companies in the mix.

As Matty correctly states VTS is an American Domiciled ETF not an Australian Domiciled ETF. Although you can purchase VTS on the ASX, the ETF is actually based in the USA. This means if you own VTS you have the added complication of having to deal with the US tax system at tax time.

If you buy VTS you will need to complete US Tax forms such as the W-8BEN in addition to your usual Australian Tax return. Investing in American Domiciled ETFs also opens you up to the possibility of paying death taxes (to the US government!)

Any changes the USA decides to make for foreign investors in the future would become your problem.

I don’t know about you but I don’t have time for keeping up with the US tax system. Keeping on top of the ATO is enough for me!

I avoid that nonsense by only investing in Australian Domiciled ETFs.

And it sounds like Matty wants to do the same.

Let’s take a look at what the VTS ETF invests in so that I can help Matty out in finding an equivalent Australian Domiciled ETF.

American Domiciled Funds

• VTSAX: Vanguard Total Stock Market Index Fund
• VTI: Vanguard Total Stock Market ETF
• VTS: Vanguard US Total Market Shares Index ETF

VTS is an Australian ETF that is based on one of Vanguard America’s Managed Funds known as VTSAX: Vanguard Total Stock Market Index Fund Admiral Shares

There is an equivalent American ETF trading on the US markets that tracks this managed fund known as VTI: Vanguard Total Stock Market ETF

When you jump across the pacific, Vanguard’s Australian ETF that is equivalent to both VTSAX and VTI trades on the ASX as VTS: Vanguard U.S. Total Market Shares Index ETF

Check out my What Is An ETF post if you need to understand the difference between an ETF and a Managed Fund.

VTS aims to track the return of the CRSP US Total Market Index.

As the name suggests, this Index basically tracks all stocks that exist in the US stock market. Buying VTS is a simple way to invest in every US stock.

Currently VTS is invested in approximately 3,500 US stocks

Equivalent Aussie ETFs

There are three Australian Domiciled ETFs worth considering to replicate what VTS invests in:

• IVV: S&P 500 ETF (Large-cap)
• IJH: S&P 400 ETF (Mid-cap)
• IJR: S&P 600 ETF (Small-cap)

These ETFs are all offered by Blackrock Australia as Australian Domiciled ETFs under their iShares brand.

The best Australian Domiciled ETF to track the US Market is IVV: iShares S&P 500 ETF

IVV invests in the S&P 500 which measures the performance of 500 large companies listed on the US Stock Markets. IVV and the S&P 500 covers approximately 80% of the US Stock Market Capitalization. At the time of writing the minimum market cap for a company to enter the S&P 500 was $8.2 billion USD.

Although IVV holds 500 stocks and VTS holds 3,500+ stocks, you can get 80% of the same performance by investing in IVV as you would from investing in VTS. This is because the S&P 500 is such a large constituent of the US Stock Market.

If you want to replicate VTS as closely as possible then you need to buy not only IVV but also IJH and IJR.

IJH: iShares Mid-cap ETF invests in the S&P Mid-cap 400 index. These mid-cap stocks are companies that are smaller in value then the stocks that make up the S&P 500. IJH and the S&P 400 covers approximately 7% of the US Stock Market Capitalization. At the time of writing the S&P 400 contained stocks with a market cap between $2.4 billion and $8.2 billion USD.

IJR: iShares Small-cap ETF invests in the S&P Small-cap 600 index. These small-cap stocks are companies that are smaller in value then the stocks that make up both the S&P 500 and the S&P 400. At the time of writing the S&P 600 holds stocks with a market cap between $600 million and $2.4 billion USD.

Anything worth less than $600 million USD is known as a micro-cap or nano-cap company. These companies are so small that it isn’t worth worrying about for the average ETF Bloke so give them a miss.

The Best Australian Domiciled ETFs

Investing in IVV + IJH + IJR will allow you to own the top 1,500 stocks in the US Market using Australian Domiciled ETFs.

IVV + IJH + IJR are not 100% equivalent to VTS but you will barely notice the difference. The only stocks missing from these three ETFs are micro-cap and nano-cap stocks that are valued at less than $600 million and have little impact on your portfolio.

Hope that answers your question Matty!

If you want to get in touch with ETF Bloke drop me a line on the Contact page and I will get back to you.