Best Performing Index Funds in New Zealand for 2022: FIF vs PIE, Tax Slippage, Full Fees Comparison

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Are you a New Zealander interested in passive index fund investing? If so, you may be wondering which index fund is the cheapest and best performing option available to you right now. In this article, we will be discussing the top five globally diversified index funds in New Zealand and providing a comprehensive analysis of their fees, taxes, and overall costs. By the end, you’ll have a clear understanding of which index funds are the best choice for you based on your investment goals.

Key Points:
– The S&P 500 drives most of the world stock market returns, making it a significant component of international index funds.
– Five index funds will be examined in this article: VT (Vanguard Total Stock Market Index Fund ETF), Vanguard International Shares Select Exclusion Fund, Kernel S&P Global 100 Fund, Smart Shares Total World ETF, and AMP All Country Global Shares Index Fund.
– Management fees, buy/sell spreads, transactional costs, and taxes are all factors to consider when evaluating the overall cost of investing in index funds.

Management Fees

Management fees are one of the key factors to consider when calculating the total cost of an index fund. Different funds have varying management fees, ranging from as low as 8 basis points to as high as 45 basis points.

  • VT, the Vanguard Total Stock Market Index Fund ETF, has a tiny management fee of 8 basis points.
  • The Vanguard International Shares Select Exclusion Fund has a management fee of 20 basis points.
  • The Kernel S&P Global 100 Fund has a management fee of 39 basis points, which drops to 29 basis points for balances over $25,000.
  • The Smart Shares Total World ETF listed on the NZX has a management fee of 40 basis points.
  • The AMP All Country Global Shares Index Fund has the highest management fee, coming in at 45 basis points.

Additionally, the Kernel S&P Global 100 Fund charges a platform fee of $3 per month, equivalent to an additional 36 basis points per year for balances under $25,000. However, for balances over $25,000, a 10 basis point rebate is offered, resulting in an actual total cost of around 54 or 44 basis points, depending on the balance.

Transactional Costs

Transactional costs include brokerage fees and foreign exchange fees associated with buying and selling funds. These costs can significantly impact the total cost of investing in index funds. It’s important to consider these costs when evaluating the overall expense of an index fund.

  • The VT Vanguard Total Stock Market Index Fund ETF has an estimated annual cost of around 40 basis points based on Interactive Brokers’ pricing for larger investment amounts.
  • The Vanguard Select Exclusions Fund has a reasonable buy/sell spread of 7 basis points.
  • The Kernel S&P Global 100 Fund has no buy/sell spread, but investors may incur brokerage and foreign exchange fees when others buy, sell, or redeem units in the fund.
  • The Smart Shares Total World ETF can be bought with no brokerage fees through InvestNow.
  • The AMP All Country Global Shares Index Fund has a buy/sell spread of 7 basis points, similar to the VT fund.

Taxes

Understanding the tax implications of investing in index funds is crucial for accurately calculating the overall cost of your investments. In New Zealand, investments in foreign index funds are taxed under the FIF (Foreign Investment Fund) rules. Different methods can be used to calculate taxable income, and some funds have advantages or disadvantages depending on the method chosen.

  • The FDR (Fair Dividend Rate) method assumes a fixed, deemed return of 5% annually, regardless of the actual return. This method is beneficial if your actual return is higher than 5% but less advantageous if your return is lower or even negative.
  • Portfolio Investment Entities (PIEs) must use the FDR method for taxation. In contrast, investor taxpayers using Fifth Eligible Funds have the option to switch between FDR and Comparative Value (CV) methods each year.
  • The Vanguard fund available through InvestNow is classified as an Australian unit trust and, therefore, subject to complex tax implications. According to a white paper from a reliable source, this fund is subject to full taxation on all distributions, including capital gains. This means that over time, all returns from this fund will be treated as income, resulting in a higher tax liability.
  • Tax slippage is another hidden cost to consider. Most funds mentioned in this article, except for the Kernel and AMP funds, experience tax slippage due to the inability to pass through foreign tax credits. This may lead to higher tax payments for investors.

Total Cost Analysis

Taking into account all fees, taxes, and transactional costs, it becomes clear that the vanguard fund available through InvestNow has a higher total cost than initially expected. The management fee, combined with tax implications, results in an estimated cost above the AMP fund. This analysis emphasizes the importance of thoroughly understanding the fees and taxes associated with each index fund before making an investment decision.

In conclusion, when selecting an index fund in New Zealand, it’s essential to consider management fees, transactional costs, and taxes as part of the total cost analysis. This article has provided an in-depth analysis of the fees and taxes associated with five globally diversified index funds, highlighting the potential hidden costs and tax implications. By carefully evaluating these factors, investors can make informed decisions about which index funds offer the best value and performance for their individual needs.