By Amanda Morrall
While both the demand for and value of exchange traded funds (ETFs) overseas continues to increase, New Zealand's ETF market, of which the NZX remains the sole trader, is conspicuous by its relative unpopularity.
Smartshares, a wholly owned subsidiary of sharemarket operator NZX, launched its first fund 16 years ago (SmartTENZ a basket of shares mirroring the NZX 10 Index). Since then, it has introduced SmartFONZ (NZX 50 Portfolio Fund), SmartMIDZ (NZX MidCap Index Fund), SmartMOZY (NZX Australian MidCap Index Fund) and SmartOZZY (NZX 20 Australian Leaders Index Fund).
Between the more than 14,000 unit holders invested in these funds, there is close to NZ$300 million under management. By comparison, New Zealanders had, as of August this year, NZ$106 billion invested in term deposits.
Sam Stanley, head of Smartshares, blames the relative lack of interest on poor marketing, a lack of distribution channels and also general ignorance, but is confident the domestic market for ETFs is set to take off in New Zealand. (For more on how to invest in international based ETFs using a New Zealand domiciled fund manager read this story by Amanda Morrall).
To tweak the investing public's interest, Smartshares is looking to expand its ETF market in 2013 to include a range of new offerings including a commodities fund (possibly focused on gold), a fixed interest fund, an Asian high yield fund and a global equities fund.
While ETFs here may not be able to compete with the low-cost fee offerings in the United States (last month investment house Charles Schwab lowered its fees on a select range of ETFs to 0.04%-0.06%, Stanley maintains they are still good value for investors.
Smartshares' range of ETFs charge between 0.60 and 0.75%. Although the investment fees in other managed funds are wide ranging, the average is around 1%, something Stanley is keen to point out.
"Someone trying to actively trade and outperform the market may be paying 1-2% so 0.60% is low cost.''
The fees charged by Smartshares are all inclusive covering brokerage, custodial charges and registry fees, notes Stanley.
Diversification is perhaps a stronger selling point for ETFs in New Zealand.
"It spreads the risk across a whole basket of stocks," said Stanley.
While investors in ETFs may miss out on the gains of one particular stock doubling in value (assuming that's where all their money was invested), they are also protected from big losses through an ETF because of the diversification component.
There are three points of entry into an ETF: via a broker, a financial advisor or through Smartshares itself. The minimum investment amount is NZ$1,500.
Stanley cautions rookie investors against rushing into the market without the benefit of professional advice. He said the majority of investors tend to come into these funds through a financial advisor or a broker.
While ETFs may not appeal to the more aggressive and risk tolerant investors, their performance, relative to term deposits, is nothing to sneer at.
The following three case studies below, produced by Smartshares, show how investors with specific savings goals, would have fared with ETFs compared with term deposits or straight forward bond portfolios.
Sam is saving for a deposit on her first home. Her savings goal is NZ$40,000 in three years and she can afford to put aside NZ$1,000 a month. Sam is looking for the investment that will help her reach this goal fastest. She has considered two options:
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1 Based on Reserve Bank average six monthly term deposit rate for the past three years.
2 Using actual historical returns of the TENZ (NZSX 10 Index Fund) over three years as reported by FundSource as at 30 April 2004. The returns are after tax and management fee but before brokerage which is usually 0.8 – 1.4%.
3 This example assumes that the full gross annual (i.e. before any applicable taxes) of the interest and the dividends received are reinvested. Any tax on these returns is ignored for the purposes of this example.
With a bank account Sam did not reach her target of NZ$40,000. With SmartTENZ Sam is NZ$4,631 ahead of where she would be if she used a bank savings account and has exceeded her NZ$40,000 savings target. This is a clear indication of the superior longer term performance of Smartshares over bank deposits.
Dave and Mandy are in their mid 50s. Their children have just left home and they want to build their retirement savings. They are weighing their options:
Reinvesting the rental income from their investment property (NZ$1,000 per month) into bank deposits or Smartshares
Selling their investment property which would net them NZ$200,000 to invest in bank deposits or Smartshares.
They'd like to retire in about five years and they need the best performing investment option to ensure they can live comfortably in retirement. The table below outlines the potential performance of their investment options. It assumes a bank account pays 5.43% pa1 over five years with interest compounding, and SmartMIDZ posts a return based on the NZSX MidCap Gross Index return of 12.08% pa2.
| Rental income reinvested into either: | Year 1 (NZ$) | Year 2 (NZ$) | Year 3 (NZ$) | Year 4 (NZ$) | Year 5 (NZ$) |
|---|---|---|---|---|---|
|
Bank deposits |
$12,350 | $25,371 | $39,099 | $53,572 | $68,831 |
 |
$12,772 | $27,086 | $43,129 | $61,111 | $81,265 |
|
Difference |
$422 | $1,715 | $4,030 | $7,539 | $12,434 |
| Sale of investment property with NZ$200,000 reinvested into either: | Year 1 (NZ$) | Year 2 (NZ$) | Year 3 (NZ$) | Year 4 (NZ$) | Year 5 (NZ$) |
|---|---|---|---|---|---|
|
Bank deposits |
$210,860 | $222,310 | $234,381 | $247,108 | $260,526 |
|
|
$224,160 | $251,239 | $281,588 | $315,604 | $353,729 |
| Difference | $13,300 | $28,929 | $47,207 | $68,496 | $93,203 |
1 Based on New Zealand Reserve Bank average six monthly term deposit rate over the last five years to 30 June 2004.
2 Based on actual performance of the NZSX MidCap Gross Index (which SmartMIDZ tracks) for the five years to 30 June 2004.
3 This example assumes that the full gross annual (i.e. before any applicable taxes) of the interest and the dividends received are reinvested. Any tax on these returns is ignored for the purposes of this example.
The benefit of reinvesting the rental income in SmartMIDZ instead of bank deposits is startling with NZ$12,434 separating the two investment choices. The difference is even more pronounced when the sale of the investment property is reinvested into SmartMIDZ – leaving Dave and Mandy a whole NZ$93,203 better off over just five years!
Sue and Bob are a retired couple with NZ$250,000 invested in bank term deposits. They wonder if the performance of their term deposits is truly maximising their investment return potential. They are considering switching their investment over to either bonds or Smartshares, with low fees and higher historical performance. They want their investment to generate an income to support them in the future.
They have an initial investment horizon of seven years. The table below presumes the bonds return the New Zealand average over the past seven years of 5.95% and SmartMIDZ returns an average 10.32%, based on the seven year historical performance of the NZSX MidCap Gross Index to 30 June 2004.
Annual passive income generated from investment of NZ$250,000
|
Year 1 (NZ$) |
Year 2 (NZ$) |
Year 3 (NZ$) |
Year 4 (NZ$) |
Year 5 (NZ$) |
Year 6 (NZ$) |
Year 7 (NZ$) |
Total (NZ$) |
|
|---|---|---|---|---|---|---|---|---|
| Bonds 1 | $14,875 | $14,875 | $14,875 | $14,875 | $14,875 | $14,875 | $14,875 | $104,125 |
 2 |
$22,250 | $22,837 | $23,136 | $23,439 | $23,746 | $24,057 | $24,372 | $163,837 |
| Difference | $7,375 | $7,962 | $8,261 | $8,564 | $8,871 | $9,182 | $9,497 | $59,712 |
1
Based on the Reserve Bank average New Zealand one year bond rate over the seven years to 30 June 2004.
2 Based on actual performance of the NZSX MidCap Gross Index (which MIDZ tracks) over the seven years to 30 June 2004.
3 This example assumes that the full gross annual (i.e. before any applicable taxes) of the interest and the dividends received are reinvested. Any tax on these returns is ignored for the purposes of this example.
After seven years Sue and Bob would have received only NZ$104,125 in income generated from investing in bonds versus NZ$163,837 with SmartMIDZ, a staggering difference of NZ$59,712. In addition to the difference in income generated, if Sue and Bob had chosen to invest in bonds they would still have NZ$250,000 at the end of seven years. If they had instead invested in SmartMIDZ, the value of their investment at the end of the seven years would have increased to NZ$273,846 – an extra NZ$23,846!
7 Comments
Absolutely irresponsible examples - and low quality editorial control.
If we just start with the first example using SmartTENZ - which claims to be using data source in April 2004? I know why they're not using curent data.
In the example "Sam" wants to save for a home in 3 years and needs $40K. Somehow the SmartTENZ example gets away with using 12.83%pa compounding as a basis despite the fact that the latest SmartTENZ sheet claims only 6% annualised of the last 3 years and only 3.3% over the lifetime of the product.
I'll ignore that it's actually a negative -1.7%pa over the last five years - but WTF do you get off suggesting a reliable 12.83%pa return on SmartTENZ - and the investment being sutiable for a 3-year home deposit ?? Especially with brokerage to come off.
( Source http://www.smartshares.nzx.com/resources/fact_sheets/tenz_fact_August.pdf )
SmartMIDZ is much the same - 4.6%pa over the last 3 years, 5.6%pa lifetime and a minus -2.2%pa over 5 years. It's not bloody 12%pa at all. So the second examples with SmartMIDZ should actually show those 5 year investors with a blaance that is around 10% LESS than they initially deposited.
( Source http://www.smartshares.nzx.com/resources/fact_sheets/midz_fact_August.pdf )
This article is little more than an advertisement using data from 2004 that appears to have been hand-picked in order to present the product in the best possible light - and ignoring the reality of it's performance over the last 8 years.
Sam Stanley might blame "the relative lack of interest on poor marketing, a lack of distribution channels and also general ignorance" - but I'd say that New Zealanders have simply avoided a product that does not deliver and which appears to be almost fraudulent in it's projected returns in advertising.
The inability to out-perform bank deposits in the time is the PRIME reason why the investing public has had little to do with the limited ETF range offered by NZX.
Come on guys and girls - I expect far better from Interest.co.nz when I read an article then this sort of puff piece.
Why so angry PJK? I thought the video was very informative and raised my awareness of ETFs as an investment choice. Sure they may not be for everyone but personally I would look to allocate a proportion of my portfolio to ETFs now that understand their benefits.
A 12% return in the example based on the figures needs to be updated based on the return being half this in recent times but so does the bank savings rate need to be halved. So get the picture, which is all that these sort of scenarios are supposed to portray.
Almost fraulent is a conspiracy theory, I was surprised you didn't mention the CIA and Lee Harvey Oswald in your rant.
Anyway I thought it was thought provoking and I am pleased after reading so much about them in offshore markets that we can access them here.
Take your angry pills PJK, because this Market has way too many knockers and naysayers like yourself who damage new ideas and capital Market growth.
Keep theses features coming interest.co.nz please, most of us are keen to know more.
Smartshares suffers from a low variety of funds, high fees, and a small, relatively illiquid market.
I moved most my ETF investments to Australia years ago. Access to the ASX in NZ is no more painful than access to NZX, and there's a much wider range of ETFs and ETCs with lower costs listed there - there are several US-based ETFs cross-listed there as well as the Australian ones. See http://www.asx.com.au/products/managed-funds-product-list.htm (look at "ETPs")
If Smartshares is going to diversify into e.g. international equities, I doubt they will be competitive based on their current fees. e.g. smartOZZY charges 0.60%pa; an equivalent ASX-listed ETF would cost you 0.24% - 0.28%; even ETFs that invests internationally are well below 0.60% in general.
For those interested in learning more about the types of ETF's available you could start with this link which covers the main issuers. By clicking on the name of each provider it takes you through to the respective websites
http://www.etftrends.com/etf-resources/etf-providers/
There are also some valuable resources on the ishares.com and vanguard.com websites
Hi Amanda
I totally agree with PJK!!! Very poor effort on your part for letting the NZX use old data - 2004 numbers to sell their products, who are they kidding??!!! Would you have let a stock broker get away with that lark - bet you wouldn't!
The fact is that the returns over the past few years have been poor, which is why Sam has been very "convenient" with his use of numbers and the comparsions. How do I know this - cause I have been contributing to the MDZ, TNZ, MZY and OZY funds monthly since July 2009, and I can assure you the returns have been poor, and simply using bank term deposits would have provided a better return, with zero risk.
Amanda: can you please review this article and update it to reflect the NZX numbers over the past 5 years, then get Sam to explain why the funds have performed so poorly (I'll give both you and Sam a hint: high fees).
Kindest regards
Average_Punter
Amanda for even
s
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