Investing from Australia

 provides information for Australian residents looking to implement Boglehead-style investing and apply the Bogleheads® investment philosophy. The advent of exchange-traded funds in Australia gives investors the ability to access Australian and global equities and bonds at low cost.

The Australian pension system is centered around the contributory Superannuation system.

Portfolio construction
While nowhere near the breadth and depth of low-cost exchange-traded funds (ETFs) and similar products in the US, there are ample options for putting together a low-cost portfolio in Australia. Vanguard entered the Australian market in May of 2009 with index-tracking funds for the Australian Stock Exchange 300 Index (ASX300), which covers approximately 81% of the capitalization of the Australian stock market; and for US and non-US global markets. Since 2009 the ETF market has steadily grown; by 2015 the market reached maturation.

Some good resources for analysing the various fund options include:

VAS vs LICs
Listed Investment Companies (LICs) are the Australian version of closed-end exchanged-traded funds. They are actively-managed and so not an immediately-obvious choice for people looking to invest according to Boglehead philosophy. However several of them have competitive management fees, and work to minimise transactions (and therefore taxable events). They are a way of diversifying away from the sector concentration apparent in the ASX index, and they sometimes can be snapped up at a discount to Net Tangible Assets/Net Asset Value (NTA/NAV). Furthermore, some of them have been listed on the ASX since the 1930s.

The most common LICs for people looking for an alternative to Vanguard Australian Shares Index ETF (VAS) are Australian Foundation Investment Co.Ltd (AFI), Argo Investments (ARG) and Milton Corporation Limited (MLT). These don't generally trade at a deep discount to NTA, so if you can't get them at a fair discount to NTA then stick with VAS.

ASX sector concentration
Australian market capitalisation indexes tend to be heavily weighted towards financials (approx 43% for the ASX200) and materials (currently 13%, until recently the weighting was much higher). Furthermore, the index is largely dominated by six companies - the Big 4 banks, BHP Billiton and Rio Tinto.

Contrast this with the US market for which is much better diversified across all sectors.

The main strategies cited for mitigating this concentration risk are:
 * Single stock purchases to give greater exposure to other sectors (examples would be Washington H. Soul Pattinson (SOL) and Brickworks Limited (BKW);
 * Purchase of international index-tracking ETFs (eg VTS, VGS);
 * Purchase of ETFs that use a different metric than market capitalisation to calculate weightings. Examples would be Betashares FTSE RAFI Australia 200 ETF (QOZ), a "smart beta" ETF which uses RAFI to determine weightings, and Market Vectors Australian Equal Weight ETF (MVW), which is an "equal weight" index.

Note that QOZ and MVW, while promising products, have MER of 0.30% and 0.35% respectively, significantly above the 0.10% MER of VAS and high considering the products are based on a simple formula. There is a risk that if you were to invest in them now, and then a competing product came along with a lower MER, you would either be stuck with the higher-MER product, or you may incur a capital gain if you switched to the new product.

ASX and yield
Australian companies on average tend to return more to shareholders in the form of dividends than their US counterparts. For example the VAS (ASX300 index tracker) has tended to yield around 5%, whereas VTS (US S&P500 index-tracker) has tended to yield around 2%.

Home bias
Australians tend to have significant home bias, holding on average 70% of their equity holdings in Australian stocks, while the Australian market is only 3.5% of the global economy.

Assuming ASX index-tracking funds, such as Vanguard Australian Shares Index (VAS) etc., anywhere up to about 50% of your total portfolio in Australian equities should be fine; more than this and you may wish to consider a larger holding in international equity as the risks of portfolio concentration start to outweigh the benefits from franking.

International equity
There are a couple of options for international exposure.

VTS/VEU:  VGS: IWLD:
 * Vanguard Total US Market (VTS) = Total US market (large/mid/small caps).
 * Vanguard International Ex-US (VEU) = Total Ex-US market (large/mid/small caps, including both developed and emerging markets).
 * Global cap weights are roughly 50/50 VTS/VEU.
 * Covers the entire investable world (large/mid/small caps, both developed/emerging markets).
 * US domiciled, so subject to US estate tax.
 * Much lower cost than all other other options.
 * VEU contains about 5% Australian stock and there are no franking credits.
 * Vanguard MSCI Index International Shares ETF (VGS) covers about 75% of the investable world - large/mid caps, developed markets, so missing small caps and emerging markets.
 * Is Australian domiciled so no US estate tax issues.
 * Cost is about 2.5 times VTS/VEU, but still reasonably priced.
 * Can add in Vanguard International Small Companies Index ETF (VISM)/ Vanguard Emerging Markets Shares Index ETF (VGE), with global cap weights roughly 75/15/10 VGS/VISM/VGE, to cover the entire world's investable markets. Investors can also tilt to overweight small caps and/or emerging markets.
 * iShares Core MSCI World All Cap ETF (IWLD) Covers almost the entire investable world (large/mid/small caps, developed, but misses emerging markets).
 * Is Australian domiciled so no US estate tax issues.
 * With Australian index & fixed income, a three-fund portfolio is easily manageable.
 * Can add in emerging markets and have an all world diversified equities (market cap is IWLD/EM 90/10).
 * Cost is about 2.5 times VTS/VEU, but still reasonably priced.

Currency hedging
Currency hedging should be done on a portfolio-wide level. For instance, if an investor decides on a 50-70% Australian dollar (AUD) based portfolio and selects an asset allocation of 75 equity/25 fixed income, then the 25% allocation to fixed income and the 25-45% in AUD based equities are in AUD, leaving the remaining 30-50% allocation in global unhedged equities.

Example:
 * AUD based assets:
 * 25% Fixed income (AUD based).
 * 25%-45% Australian equities or Global AUD-hedged equities.
 * Non AUD based assets:
 * 30%-50% Global (unhedged).

Global AUD-hedged equity index funds on the market include:
 * Vanguard MSCI Index International Shares (Hedged)(VGAD) is the AUD hedged version of VGS.
 * iShares Core MSCI World All Cap (AUD Hedged) ETF (IHWL) is the AUD hedged version of IWLD.

Australian equities vs global AUD-hedged equities
The choice between Australian equities vs. global AUD-hedged equities is a trade off between concentration risk and cost of hedging. The Australian index is highly concentrated, so a large allocation in Australian equity is taking on a lot of single market and single sector risk. Hedging on the other hand has costs. The costs of hedging go beyond the management expense ratio (MER). In addition franking credits are lost. Vanguard's diversified funds tackle this problem by splitting between the two, to reduce cost of hedging and to reduce concentration risk. A simple version of this might be (for an investor selecting a 75 equity/ 25 fixed income asset allocation).

Example:
 * AUD based assets:
 * 25% Fixed income (AUD based).
 * 25% Australian equities.
 * 15% Global AUD-hedged equities.
 * Non AUD based assets:
 * 35% Global (unhedged).

Non-liquid investments should also be considered. For instance, an investor possessing income producing assets in Australian property may already have half of her assets AUD based; so if the total wealth allocation targets 50-70% AUD based assets, the combination of property and the fixed income liquid assets are AUD based. Thus she may decide to hold her equities in global unhedged equities.

Bond ETFs
There are several bond ETFs on the ASX, the two most common being:

Exchange-traded bonds
There is a good list of bonds which can be bought and sold directly on the secondary market here.

Typically the market maker will make a market around the value in the "Valuation Price" column. Once you have decided which bond you'd like to purchase you simply enter the value in the "Code" column as the ticker code and you should be able to get quotes or place an order as you would any other stock or ETF trading on the ASX. For example, GSBG26 is the code for a bond expiring in 2026. It pays 4.25% per year, with two distributions a year, until the bond expires at which point you receive $100 for each bond you hold.

Apart from brokerage there is no MER or other expense for holding exchange-traded bonds so they are a cost-effective way to add fixed income exposure to your portfolio. However compared to bond ETFs above, the price of long dated bonds tend to move quite a bit more in response to changes in interest rates.

As of April 4, 2016, the longest term for an Australian Government exchange traded bond is 23 years.

Fixed income LICs
If you go to the LIC tab on the ASX website's ETP section you can see a couple of Australian Masters Yield Funds toward the bottom. These are closed end fixed income funds. The MER is significantly higher than that for the Vanguard bond ETFs above, but they can sometimes be bought for a significant discount to NTA so are worth mentioning.

Tax-free bonds
There are currently no tax-free bonds in Australia (like municipal bonds in the US).

Cash savings accounts
You can get a good comparison of rates on savings accounts from the Canstar site. The ING Savings Maximiser is a popular choice, though it requires you to deposit at least $1000 & perform at least 5 card transactions in month in order to get the top rate of interest, currently 1.8%. Other options have lower bars to entry.

A comparison can also be found in Whirlpool AU Bank Account Comparison, a spreadsheet maintained by the Whirlpool Forums community.

Bonds vs cash
Considering the effective rate on Australian Government Bonds, as of March 2016, yields about 3.25%, and the Australian Government has a deposit guarantee scheme on cash deposits up to $250,000 per person, per institution, the question arises, "why bother with bonds at all?"

Looking at yield alone, cash savings accounts, as of March 2016, beat bonds by 25 basis points. Furthermore, there is no brokerage cost involved when keeping your money in the bank. And if interest rates increase, the extra interest should be passed on to the depositor. The main difference arises from how the two move when interest rates decrease. Should the Reserve Bank's cash rate decrease from 2% then the bonds would increase in value as they continue to pay 3.25% to bondholders, while depositors would be at the mercy of the new lower rate. As always, your choice regarding cash vs. bonds will depend on your circumstances, but keep in mind that there is more to the story than just current yield.

Emergency fund in mortgage offset account
One benefit from having a home loan is that it gives you access to a mortgage offset account. Putting the money earmarked for your Emergency Fund into a mortgage offset account allows you to reduce the interest paid on your loan, and interest received is not taxed as it would be if you kept the money in a regular savings account.

Buying vs renting
Rule of thumb: For lower tax brackets, renting and investing is better; for higher tax brackets buying works out better as you pay rent with post-income-tax dollars while interest payments are taxable.

Vanguard ETFs vs managed funds
In addition to ETFs, Vanguard also offers retail and wholesale direct investment to their funds.

According to Vanguard's website, investing directly into Vanguard's retail and wholesale managed funds requires a minimum investment of $5,000 and $500,000 respectively, with the latter having lower management fees. However it's the world's worst kept secret that if you call up they will generally let you open a wholesale account with a minimum $100,000 investment.

A comparison of the fees on the Vanguard S&P/ASX300 index-tracking offering for ETFs, retail and wholesale managed funds is as follows:


 * &dagger; Transaction cost is on top of the spread, buying or selling the product

If you don't have access to the wholesale fund then the annual fee on the retail fund may be a bit steep. For example, if you invest more than about $3,000 into the above S&P/ASX300 index-tracking retail fund then in just one year you'll have paid more in fees compared to the ETF to have covered the brokerage on the transaction.

When comparing costs between the wholesale fund and the ETF, things like your investing horizon and frequency of transactions become more relevant. On $100,000 the difference per year is only $60 (100,000 x (0.16-0.10)%). This is more likely to be relevant in retirement if part of your plan is to frequently sell down a portion of your holdings as there is no cost (beyond the spread) for selling out of the managed fund. Still, if your holdings were over $600,000 then the difference would be $360 which would cover 24x $15 brokerage transactions per year.

The one benefit the managed funds have over the ETFs is that they offer several diversified funds. Fees appear to be in line with what they would be if you put together the portfolio yourself, and rebalancing is taken care of for you.

Brokerages
Most banks offer online trading accounts for $15-20 per trade, extra for live market data. There are also several online brokerages such as SelfWealth ($9.5 per a trade). Interactive Brokers (IB) charges commission as a percentage of trade value (.08% of trade value with minimum $6).

Managed funds and Etax
Etax currently does not pre-populate distributions from managed funds (eg Vanguard retail/wholesale managed funds). You have to use the tax statement provided by the fund and enter it manually into Etax.

One of the reasons for this is that Etax cannot work out what your CGT position is unless you tell it to based on the information you enter (purchase & sale dates, 50% concessional amounts etc).

Superannuation
Superannuation is a defined contribution retirement savings arrangement and provides tax-shielded accounts, similar to a 401(k) in the US.

Risks and possible changes
Superannuation has seen several changes since its inception in 1992 and will no doubt continue to evolve. Some of the potential changes discussed include:


 * Increase in Contributions Tax
 * Introduction of a Withdrawal Tax
 * Changes to Preservation Age
 * Compulsory annuities
 * Restrictions on lump sum withdrawals

Previous changes have tended to be grandfathered to an extent.

Costs and choice
Here is calculated the all-in investment costs of several super funds that offer indexed investments of some type. This section may be a useful aggregation of information because Australian super funds are typically not transparent about fees: complete fee information is neither easy to find, nor easy to compare. This list is neither exhaustive, nor likely free from error; changes occur all the time. It's important to note that none of the fund complexes discussed below use indexing for their default fund. All default funds are actively managed and much higher cost than the indexed options. If you want low cost indexed investments for your superannuation account, you will have to explicitly search for and make that choice.

There are three ways to invest with index funds through Australian super: (1) by directly investing in index funds, (2) through balanced index funds, or (3) through brokerage platforms that permit investment in exchange traded funds (ETFs). This section covers all funds (two) that have method (1), many (most?) of the funds that have method (2), and a small selection of funds that allow (3), the selection being the first several that appeared in a google search during July 2018 or that also have methods (1) or (2). Below is a summary of findings with further details in a Google sheet available here: Index Super Options Costs. Dollar amounts mean Australian dollars (A$).

Australian super funds typically have fixed annual dollar fees plus percentage of balance fees for fund complex management plus percentage of balance fees for investment management. Because of the fixed dollar fees, to make an all-in cost comparison a representative portfolio is needed. Chosen is a $100,000 super balance invested in a 50:50 mix of stocks and bonds with 10% Australian stocks, 40% global ex-AUS stocks, 10% Australian bonds, 40% global bonds hedged to the A$ (or nearest equivalent). This mix is not a typical Australian portfolio but favors a global balanced portfolio with a 10% allocation for any asset class being the minimum to bother with. While your correspondent favors such a portfolio, you, dear reader, are free to adjust the spreadsheet to your personal preferences. Why $100,000? According to an Association of Superannuation Funds of Australia 2017 report Superannuation account balances by age and gender, "Average balances achieved in 2015-16 for all persons aged 15 and over were $111,853 for men and $68,499 for women." So $100k is currently (circa 2018) the right order of magnitude for the average Australian superannuation account balance.

Direct Indexed Investment. Start with the two funds that have options for direct indexed investment. Note for the tables that a basis point is common financial jargon for 0.01%: 50 bp = 0.50%.

The index funds available follow indices:


 * S&P/ASX 300 Accumulation Index
 * MSCI World Index ex-Australia (unhedged in Australian dollars)
 * Bloomberg AusBond Composite 0+ Yr Index
 * Bloomberg Barclays Global Aggregate Index, hedged to $A

and the index funds are Vanguard funds. The only substantial difference is that Sunsuper puts all bonds into a single fund with 50% Australian bonds and 50% hedged global bonds, whereas First State allows you to set that allocation yourself. However, both these funds seem good choices with the choice between them probably coming down to either your personal convenience or a closer fit to your needs for insurance. (Getting term life insurance through your super is often a much better deal then getting it outside super, that is if you need life insurance at all.)

Balanced Index Funds. There are several fund complexes offering balanced index funds, composed from essentially some version of the four indices noted above perhaps with a separate allocation to property. Unfortunately, while some are reasonably priced, they all suffer from the standard problem with a balanced fund: is management's chosen allocation right for you and will it be right for you for all time. That's not a terrible problem because you could stick with simplicity and very likely reach your financial goals. A more important defect, however, is that all these balanced index funds add the risk of market timing. All the managers say they adjust the asset allocation among the index funds based on their strategic views. One advantage of index funds is shedding manager risk. You will have to decide if the simplicity of a single fund is worth the extra risk of market timing by management.

Note how well priced the HOSTPlus balanced index fund is; it's the lowest priced by far of any fund.

As all the above funds are so-called industry funds (not for profit), in the interests of fairness and from curiosity of how much difference there is, also profiled is one for-profit super fund. The fund chosen is BT Parorama, which is Westpac Bank, because they recently (mid 2018) said they were going to "slash" fees---coincidentally just prior to the Royal Commission's investigation into super funds. To be fair, the construction of the fund and its underlying index funds seems pretty good. It fails to be competitive by larding on too much cost.

Self-Directed Brokerage Option. Many fund complexes have a brokerage platform where you can do it yourself and invest through the ASX in good, low cost, ETFs. For the funds examined the problem with this approach is that, while the ETFs are low cost, the extra fixed dollar fees are very high to access the brokerage platform. Not to mention that there are brokerage costs for every transaction. The cost calculation for this option neglects brokerage fees because every investor may transact differently, but clearly brokerage fees of even $10 per transaction can quickly add up to overwhelm the dollar costs of a modest super balance. I assume use of Vanguard ETFs or something similar (most fund complexes have a limited approved list of ETFs that you can invest in) to make up the comparison portfolio.

If you consider the HOSTPlus brokerage option, be aware of their unique rules that limit both how much of your balance can be in any single ETF or in the brokerage option at all. Essentially your asset allocation is limited if you want to build a complete portfolio through the brokerage option.

Safe withdrawal rate
In Australia, studies indicate a safe withdrawal rate to be around 3.5%, compared to the Trinity study of 4% for US residents.

Should I pay off my HECS debt?
Similar to the US, Australians often leave tertiary studies with a large debt burden.

Higher Education Contribution Scheme (HECS) debt has the following characteristics:
 * It is automatically deducted from your salary once you are earning above $50,000;
 * Increases with CPI;
 * Attracts no interest;
 * Lump sum payments attract a 5% discount.

The consensus is that it is better to never take the 5% lump sum discount, and instead use money slated for lump sum payments towards investing goals. This could change in a high-inflation environment, where debt increases due to CPI were outpacing investment growth and salary increases.

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