When it comes to passive (or hands-off) investing, the undisputed vehicle of choice is the exchange traded fund (ETF). ETFs allow to you ‘own the market’ rather than trying to pick winning stocks yourself. After all, if you can’t beat the market (and most investors can’t), why not just join it?
Even the greatest investor of all time – Warren Buffett – has said that most investors would be better off putting their money in a market-tracking index fund.
What to look for in an ASX ETF?
When it comes to market-tracking ETFs, you really only have two variables you need to choose between – which index to track and how much you’re willing to pay in fees. The first choice is the easy one as there are only two indices you can choose from if you want an ASX ETF – the S&P/ASX 200 (INDEXASX: XJO) or the S&P/ASX 300 (INDEXASX: XKO). The ASX 200 tracks the largest 200 public companies on the ASX and the ASX 300… I’m sure you can guess.
The performance gap between these two indices is not substantial – for example, XJO has returned an annualised performance (included reinvested dividends) of 8.55% over the past 5 years, whereas XKO has returned 8.57%.
The one point of difference lies with the dividend yield. As the XJO index is more concentrated in the large dividend payers like Commonwealth Bank of Australia (ASX: CBA), its dividend yield is higher. To illustrate: an XJO-tracking ETF like the SPDR S&P/ASX 200 Fund (ASX: STW) has a trailing yield of 4.28%, whereas an XKO ETF like Vanguard Australian Shares Index ETF (ASX: VAS) has a trailing yield of 3.90%.
If you’re an income investor or just like your dividends, then going with an XJO-index might be a better fit, but as the performance shows, it doesn’t really matter in the long run.
What about fees?
Of course, the other major variable is fees. Most ASX index ETFs charge low fees, but some are lower than others. STW for example charges a fee of 0.19% per annum. VAS is lower at 0.10% p.a. and the BetaShares Australia 200 ETF (ASX: A200) wins the prize with a fee of 0.07% p.a. Over many years, slight differences in fees can add up, so if the only difference between XJO ETFs is the fees, personally I would vote with my wallet.
When it comes to choosing an ASX-tracking ETF, balancing fees with which index to track is the name of the game. I am personally a fan of Vanguard in general, so I like VAS, but you can’t beat A200 for fees.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.