Index funds attracting investors

AUSTRALIAN investors can select from a small but growing number of ‘index’ funds.

Vanguard Investments, the global pioneer of index funds, offers an Australian Share Fund, which aims to track the S&P/ASX 300 index, before fees and expenses.

To ensure it closely tracks the index, Vanguard selects a representative sample of shares in the index, normally numbering about 250.

Over the three years to July 2002, the fund has returned 3.7 per cent per year, while the index has gained a slightly higher 4.2 per cent each year.

The discrepancy between fund and market returns has historically averaged about 0.5 per cent, reflecting fees and expenses. This difference becomes more conspicuous when overall returns are at current low levels.

An alternative to the Vanguard product is to invest in ‘index-based’ Exchange Traded Funds.

ETFs are listed on the ASX and can be bought and sold like shares, whereas investors in managed funds (like the Vanguard product) buy unlisted units in the fund.

In practice, the two kinds of products have similar investment objectives.

Salomon Smith Barney pioneered the ETF market in Australia with the launch of a product called IndexShares100. As the name suggests, it aims to match the performance of the S&P/ASX 100 index.

A variation on this theme is Salomon Smith Barney’s IndexShares100 High Yield Instalments.

By using instalments (equivalent to making a down-payment), the new product entitles investors to all dividends, franking credits and capital growth while only paying one third of the price.

Fund manager State Street has also launched a series of Exchange Traded Funds.

State Street has three ETFs, tracking the S&P/ASX 50, S&P/ASX 200 and S&P/ASX 200 Listed Property Trust indices.

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