Should I buy VTSAX or US 500 in New Zealand?
04 Apr, 2021
I’m not often on Facebook these days, I don’t know about you but I find their systems excessively needy, always badgering me for my attention. But this week I read a question on the Kiwi Mustachian page from a woman by the name of Kimberly who was asking a particularly good question:
For Kiwi Mustashians in the wealth-building stage of their journey, are you investing in Vanguard Total Stock Index Fund (as per J L Collins theory) or are you investing in an NZ version of this (e.g. Sharesies US500)?
Several people responded but they never quite answered her original question, so several follow up questions from Kimberly followed:
Do you have any thoughts around advantages or disadvantages between investing in US500 over Vanguard Total Stock Market Index Fund for us investing from NZ?
Do you know if there is any advantage to investing in Vanguard over the US500 (via something like Smartshares) for us in NZ?
After multiple replies from the group, I could tell she was still searching for information. I thought about typing in my thoughts there and then, but then I thought that such a question required more than a social media soundbite and that it might also be useful to other Happy Savers. This is an important question and it needs a detailed answer because in my view Kimberly is on the brink of making one of the most important investment decisions of her life and she needs to feel comfortable with what she is doing. And try as we might sum things up in one sentence, in many instances if you actually want to increase the knowledge that you will then be basing your investments on, you need a wider answer.
And we all know by now that I’m incapable of a brief answer!
So, Kimberly, whoever you are, this is for you!
First things first.
Who is JL Collins and what is he proposing?
He is the author of what I regard to be one the best books on investing that I have ever read, The Simple Path to Wealth and he is a proponent of index fund investing, instead of investing in individual stocks. And that is for the simple reason that from all the research he and many others have done (which you can read about in his book), people who invest in individual stocks will end up with less wealth than those who instead take the “simple path to wealth” and invest instead in broad-based index funds that buy an entire share market. If you think you are the exception to this rule, he will tell you point-blank that you are not.
If you want to learn more about him you can…
Read his ‘stock series’ on his website for free
Buy his book which is based on his stock series, but edited better
Listen to him interviewed about his book here
And the Kiwi Mustachians Facebook group that I read this question in has grown out of the American blog www.mrmoneymustache.com. Pete Adeney is the guy who retired at the age of 30 because he had become financially independent and he writes an excellent blog.
It’s also well worth googling the history of Vanguard to get a feel for why and how it operates. This is from the book that I’m reading at the moment, The Bogleheads’ Guide to Three-Fund Portfolio:
“Jack Bogle is the founder of Vanguard - the only mutual fund company owned by its investors, not by its founder or outside stockholders. This was a tremendous gift to Vanguard investors since it means that, unlike other fund companies, Vanguard does not use part of investor returns to pay company stockholders. The result is that, after company expenses, all the Vanguard fund returns go to the Vanguard fund investors. The results are remarkable”.
This blog post is not going to go into the hows and whys of index investing, I’ve done that in other posts, I want to focus more specifically on her questions. But if you are on a journey to improve your financial situation, those references are compulsory reading. Neither just talk about what to invest in, instead, they give a whole of life approach to money, something that I’m a big advocate of.
Vanguard Total Stock Market Index Fund
You need to know that JL Collins is an American and therefore he suggested one fund in particular that is, obviously, American. It’s called Vanguard Total Stock Market Index Fund and is commonly known by its ‘ticker code’, VTSAX. That is what Kimberly is referring to. An investor who buys this one fund will get a tiny wee piece of the ENTIRE American equity market including all of the small, medium and large companies, meaning it is extremely diversified. Plus it has low expenses to manage the fund, meaning that it, in turn, has low fees. To buy the VTSAX there is a minimum investment of $3,000 USD. The size of this fund is enormous, with 3669 stocks in it and a fund total of about $1.1 trillion USD! The ten largest holdings (as of Feb 2021 - Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, JP Morgan Chase, Berkshire Hathaway, Johnson + Johnson and Visa) make up 22.6% of the fund. From the Vanguard website, I read that after-tax returns for the previous five years are 14.91%. This does not mention fees, but for this fund fees charged are minimal.
Vanguard is the only investment company that JL Collins uses but I have heard him mention on many podcasts that if you are somewhere else in the world and you can’t access this fund, finding the closest alternative to it is perfectly OK. The important thing he said is that you are buying a Total Stock Market Index portfolio.
This is good news, because, if you want to buy this specific fund from New Zealand you are going to struggle to find it.
But, it’s all good because there is an alternative that we can all access from New Zealand and that is the “Vanguard Total Stock Market ETF”, ticker code VTI. This is the ETF version of the VTSAX meaning that you can purchase it for just $1NZD, not a minimum of $3,000USD. This is readily available via investment platforms Hatch and Sharesies right here in New Zealand:
But what about the other fund that Kimberly asked about in her question, namely the one called US 500? What’s that all about?
US 500
Here she is referring to “Smartshares US 500 ETF”, ticker code USF. Smartshares is owned by the NZX and they have created a range of exchange-traded funds (ETF) that track a range of global stock exchanges. Their US 500 fund invests in and tracks the Vanguard S&P 500 Index, which is one of the benchmarks of the U.S. stock market and it is designed to give Kiwis access to those US markets, from New Zealand. The top holding in this Smartshares US 500 fund is the Vanguard S&P 500 ETF, ticker code VOO. It’s kind of like they just buy it and put their own label on it. But instead of buying ALL of the US companies as the VTSAX and VTI funds are doing, this fund holds only the top 500 of the largest U.S. companies. So, it’s no longer a ‘total stock market index fund’. The top ten holdings are the same as the VTSAX and VTI but the fund total net assets are ‘only’ $658.3 billion. The five years annualised investor returns of this Smartshares fund (after fees and tax of 28%) are 13.15%.
So, for me, it fits with what JL Collins is saying about sticking to Vanguard. But it fails to be a TOTAL stock market index, but by holding the top 500 companies it is still giving us huge diversification.
Are you still with me Kimberly?
You can purchase this Smartshares US 500 ETF (USF) fund either directly from them where you can buy just once each month, on the 20th (your units are issued to you on about the 3rd of the next month) or you can buy the exact same fund using Sharesies each working day.
Why the difference?
It’s cheaper to buy direct from Smartshares because to put it simply you are buying directly from the factory that produces the units. And the fact that you can only buy once a month is absolutely no barrier at all IF you are committed to being a consistent steady long term investor who is not trying to time the market. But Smartshares have a problem on their hands these days because, in the effort to make investing interesting as Sharesies have done, people think that they need to be ‘doing something’ regularly, so Smarthshares appear out of step here with their once a month offering. You can buy exactly the same fund using Sharesies but because you are no longer buying directly from the source so to speak, they will take a small fee from each transaction, meaning less of your money actually being invested. And whereas you invest with Smartshares via your own unique CSN (Common Shareholder Number) and always retain direct ownership of your units, with Sharesies you don’t, you invest under their CSN.
When I first started to invest I was weighing up Smartshares with Investnow but at that time the Investnow platform had a terrible user experience, so Smartshares won out. Not all investment choices come down to fees and performance you see. And now, as a user of Sharesies, Hatch AND Smartshares, I can see the pros and cons of each. As an investor, it’s up to you to decide the right fit for yourself Kimberly and decide what platform you will commit to that will ensure you become a long term investor.
But wait, there is more.
Veering away from JL Collins there are other investment options available here in New Zealand which give you a way to invest in the top American companies. For example, Kernel Wealth offers an S&P Global 100 fund made up of blue-chip global companies, many of which also appear in the VTSAX fund that JL Collins suggests. This fund has a different take on the same recipe: giving us exposure to US equities because by investing in those, even though they are US based they are giving you exposure to some of those mega-companies that I listed above that have a global reach and many more besides.
There will be investment firms throughout New Zealand offering access to US markets and there will be a myriad of options available to you.
Passive vs Active, Fees and Taxes
This brings me to a few other points to consider: Passive vs Active, Fees and Taxes.
If you go with a traditional investment firm where they are actively managing a portfolio of American stocks for you then you are instantly steering away from the passive investment approach that JL Collins advocates and you will be paying more in fees and will most likely end up worse off over time.
If you instead use one of the funds mentioned above then you are a passive investor and are following an index. You will just follow the lows and highs of that index as they happen in real-time and the whole point is to just do as JL says and ‘stay the course’. Become a buy and hold investor who is unfazed by the mood of the market or the latest social media frenzy which tells you on Monday that the markets are going to crash and on Tuesday there is an up and coming single stock that you must buy because ‘everyone else is’.
If you stick with an index fund or ETF the fees will always be lower, leaving you more of your money actually invested, but in New Zealand, fees are nowhere near as low as if you were a US-based investor. And from what I understand, it comes down to scale. VTSAX fund size is $1.1 trillion USD, that’s a lot of people to spread their fees across, meaning a tiny expense ratio for the investor to pay. Take the Kiwi based Smartshares US 500 fund though and our small population of 5 million people, well those fees are spread over a fraction of that population, so they will be higher.
So for me as an investor, yes, by all means, I’m looking for the lowest costs but I don’t get too wound up about fees if the investment itself ticks all of my other boxes.
Taxes are an individual thing as well. The Smartshares fund is taxed at 28%, my own tax rate is only 17.5%. But to me, this becomes a non-issue because I (by which I mean my accountant) just offset the tax I have overpaid, with the tax I owe and also take into account the imputation credits, meaning that it all works out in the end and I pay the appropriate amount of tax. No matter who you invest with, come tax time they will provide you with a statement for you to complete your tax return. And that includes Hatch, I know people worry about the tax implications of using their platform but from what I understand having spoken to them more recently, it’s less of a barrier than it appears.
There are intricate investment returns, fee, tax and investment drag conversations going on amongst those who work for a living in this space but I have to be honest and say that I don’t occupy myself too much with it because if I were to do so it would all suddenly become too freaking hard and I would never have started to invest in the first place. Basically, I knew enough to get started and that was all I needed. If you are interested, any of these providers (with the exception of Smartshares who are behind the times here) provide a lot of good educational content about the nitty-gritty of investing.
This finally brings me around to personally answering the question you asked Kimberly, which US fund do people choose and why? I invest in the US share market via the Smartshares US 500 fund with the main reason being that when I first read The Simple Path to Wealth about five or six years ago, that was the only option available to me at the time. And the habit has stuck, the discipline to invest come what may has paid dividends. Literally. I invest on the 20th of each month and have settled into a pattern. Because the site offers absolutely no feedback as to how my investments are performing, which is another one of their weaknesses, I track my investments using Sharesight, another excellent New Zealand company. So, is this strategy working? Heck yes, for me it is. But, for my 13-year-old daughter, I have her investing in the same Smartshares fund, but using the Sharesies platform instead. And that works perfectly for her.
Same same but different!
Other platforms such as Hatch, Sharesies and Kernel have started since I first began investing and they are each offering a variant of a similar thing and I am immensely pleased to have such options available now compared to the impenetrable investing world I first faced. But it is easy to be paralysed by choice, so what you need to do Kimberly is to not dwell too long but instead find your fit and settle in for the long term, just like JL Collins suggests.
Buy a little and often and never cease and like a snowball gathering snow as it rolls, you will look up one day and realise that that money that you steadily invested over a long period of time has grown far beyond your expectations. Truly, it will.
