Smartshares NZ Top 50 vs S&P/NZX 50
26 Jul, 2020
I’ve had a number of emails asking about the changes to Smartshares, in particular the introduction of their new S&P/NZX 50 ETF (NZG) and how it compares to their existing NZ Top 50 ETF (FNZ).
If this post bores some of you rigid, I apologise in advance, maybe skip this one! The rest of you will be leaning in right now...
A deep dive into Smartshares for this post was a timely reminder for me just how intertwined and complex the investing marketplace is and that it’s really set up for the investor that already knows how to invest. Finding information was tough, there was barely enough on the Smartshares website and a trawl through other media didn’t offer up much either. So, I’ve reached out directly to Smartshares as I figure it’s best to go straight to the source right? And they were obliging of course.
Smartshares product offering rejig
Smartshares, the only ETF provider who has funds listed on the New Zealand stock exchange are having quite the rejig of their product offering at the moment and have also brought in eight new funds, bringing their total to 43 funds (about 40 more than I need if I’m honest). Smartshares have had an incredible first half of the year with their traded value more than tripling year on year from ‘just’ $360 million to over $1.2 billion. Why? Because of COVID-19. Thankfully we might not have caught the disease but we have certainly caught the investing bug and investors both large and small are piling into shares and taking advantage of a disrupted marketplace.
They have also regrouped all of the funds they offer in an attempt to make choosing a fund ‘more intuitive’ and the new NZG fund falls under the category of “Core Series” where they say it “Provides investors the core building blocks for their portfolios”. The existing FNZ fund now falls under the category of “New Zealand Shares”, investing into companies listed in New Zealand.
This new NZG fund is ‘same, same, but actually quite different’ to the existing FNZ fund and worth focusing on to divert people’s attention away from one of the key features, the lower fund charge of .20% for the new NZG fund, compared to the .50% fund charge of the FNZ fund.
Focus on fees alone can be misleading and can mean you overlook other key features.
History Lesson
It’s time for a quick history lesson and explanation (given to me by Thom Bentley, Client Director, Smartshares) as to why the FNZ fund even exists in the first place:
“The key difference between FNZ and NZG is the index used. FNZ was first listed in 2004, at which point the old Telecom NZ (now Spark) was around 25% of the NZ share market. As a result S&P Dow Jones created the S&P/NZX 50 Portfolio Index, which capped individual companies at 5% to create a more diversified portfolio for retail investors.
The new NZG ETF tracks the S&P/NZX 50 Gross Index, which does not cap individual holdings. We had a lot of feedback from the market that many institutional investors and financial advisers wanted a low cost fund that tracked the full 'headline' index rather than the capped index. Currently this means NZG investors have 30% of their fund in two stocks (a2 Milk and Fisher & Paykel Healthcare). Some investors will be happy with that level of exposure to two stocks, whereas others will be happier with the more diversified portfolio which they get from FNZ.”
Breakdown of each fund:
To explain things further, here is a quick breakdown of each fund:
NZG
S&P/NZX 50 ETF (Ticker code: NZG) - the new fund (as at July 16 2020)
Inception Date: July 2020
Total fund value: $13,355,602
Fund charges: .20%
Market price: $2.52
How many companies are in the fund? 50
Returns: No returns yet available
“The Smartshares S&P/NZX 50 ETF is designed to track the return on the S&P/NZX 50 Index. The S&P/NZX 50 Index is made up of 50 of the largest companies listed on the NZX Main Board. The weighting of each company in the index is based on its market capitalisation*.”
* What is market capitalization? The total dollar market value of a company that is traded on the stock market, calculated by multiplying the total number of shares by the present share price. It is used to work out the size of a company. Here is an example to show the market capitalisation (as at 21 July 2020) of Ryman Healthcare:
Example of market capitalisation for Ryman Healthcare as at 21 July 2020
Image source: nzx.com
Top 10 Holdings of the NZG as at 15 July 2020
Image source: smartshares.co.nz
FNZ
NZX Top 50 ETF (Ticker code: FNZ) - the existing fund (as at July 16 2020)
Inception Date: December 2004
Total fund value: $680,033,591
Fund charges: .50%
How many companies are in the fund? 50
Returns: (as at 30 June 2020, assuming distributions are reinvested, after tax of 28% and after fund charges):
1 month: 3.03%
3 months: 15.60%
1 year: -0.08%
3 years Annualised: 10.94%
5 years Annualised: 12.33%
“The Smartshares NZ Top 50 ETF invests in financial products listed on the NZX Main Board and is designed to track the return on the S&P/NZX 50 Portfolio Index. The S&P/NZX 50 Portfolio Index is made up of 50 of the largest financial products listed on the NZX Main Board. The S&P/NZX 50 Portfolio Index is made up of the same financial products as the S&P/NZX 50 Index, but with a 5% cap on the weight of each product.”
Top 10 Holdings of the FNZ as at 30 June 2020
Image source: smartshares.co.nz
What’s the difference?
Therefore, as explained above, the main difference between the two is the weighting of each company within the fund. Here are the first three companies in each fund:
FPH - Fisher & paykel Healthcare Corp Ltd
Weighting: FNZ 6.37% NZG 17.50%
ATM - The a2 Milk Company Ltd
Weighting: FNZ 5.32% NZG 13.03%
SPK - Spark NZ Ltd
Weighting: FNZ 5.19% NZG 7.43%
If you were to invest $100 in NZG, you are therefore holding 30.53% (or $30) in just two stocks, Fisher & Paykel and a2 Milk. For some investors they might be perfectly happy with that level of exposure to just two stocks, but others might prefer the more diversified approach that the FNZ will give of having just 11% in those top two stocks.
Those who have been looking for a fund that truly tracks the top 50 companies in the New Zealand sharemarket will lean towards this NZG fund, because the FNZ fund, with its capped weightings has never quite done this. In this article: Four to the core: Smartshares to expand, rearrange and reprice ETFs Thom Bentley from Smartshares refers to it as a “true NZ shares index-tracker” which will follow the S&P/NZX 50 gross benchmark. From the same article they explain “the gross index apportions holdings according to exact underlying market capitalisation as opposed to the S&P/NZX 50 portfolio benchmark that caps exposure of any one stock at 5%”
Therefore, this new fund is not a replacement for the FNZ, the makeup of it is actually quite different and has an impact on your investment mix. As an investor you need to decide what one fits with your investment philosophy and timeframe.
Fees
The lower fee of .20% is definitely an advantage and those who compare our fees with Australia and the US will be liking this a lot. Most of the Smartshares fund fees have remained the same, it’s just those in the ‘Core’ range that have dropped, bringing them more inline with international firms iShares and Vanguard.
On this Thom Bentley said “We expect that investors in FNZ who are price sensitive or who want the full uncapped benchmark will make that switch, but regular savers who want the new NZG fund could just stop their payments to FNZ and switch them to NZG.”
Personally I have never become too hung up on fees because it’s a pretty murky business in my view with a lot of “smoke and mirrors”. Yes, I am concerned about the high fees charged by active managers and that’s why I don’t use them, but amongst low fee providers the actual dollar differences (in my uneducated opinion) are often minor and to be perfectly honest it bores the heck out of me to deep dive into it! The very good Passive Income NZ blog has a greater attention to detail than me and dives deep into the nitty gritty details of fees if this is your thing: Do Fees Really Matter When It Comes To Investing?
Smartshares gave me this example in regards to fees between the two funds:
For a $10,000 investment we're talking about a $30 difference per year in fees. If Fisher & Paykel dropped 5% due to a profit downgrade or other issue, this fee difference would be more than made up in one day (FPH is 17% of NZG, so a 5% drop would cause NZG to fall 17% x 5% = 0.85%, where the impact on FNZ would be 5% x 5% = 0.25%, so a 0.60% difference in favour of FNZ).
But I mentioned “smoke and mirrors”. Sometimes things are not quite as simple as they appear: e.g. a fee of .20% vs .50%. There may also be brokerage fees, plus if you use any platform other than Smartshares to buy (Sharesies for example) then the price you pay per unit may be different to the true value of the units at that time. This is called on-market spread.
The other thing to keep in mind is tax. In New Zealand distributions from ETF’s are taxed at 28%. For someone like myself who is on a lower tax rate than this, I can claim a credit for all of this overpaid tax (but not a refund) on my tax return. I’ve blogged on tax before as this is one of the reasons I choose to engage an accountant. It can get a little confusing. The blog post I never wanted to write: TAX
How to Change Funds
If you were investing directly with Smartshares in the FNZ fund like I am and wanted to move all of your money into the NZG fund, it’s not like a bank, you can’t just transfer money from one account to another. You will need to use a broker, (I am signed up to Direct Broking but have never actually used them apart from when I blogged about it HERE: Help! I’m freaking out, how do I sell?) pay their fee and sell out of one investment and then, using that money, buy into the other, or like they mention above you can just stop contributions into one fund (yet keep that fund) and start investing into the new fund. Because I can only buy once a month with Smartshares it therefore takes longer to change funds.
If you are investing into this Smartshares fund via Sharesies or another provider however it is actually quite quick because (for a fee) you can generally sell and buy on the same day.
To be honest, that does not bother me. I’m a long term investor with a 20 - 30 year plan, so if I chose to rejig my portfolio, I might lose a couple of weeks of being in the market for that fund, but in the grand scheme of things it really won’t matter to me. For the record, I don’t trade and I don’t try to time the market.
So Ruth, would you change?
It’s a fair question to ask, because when faced with something new, we have options and choices. An all time favourite book of mine is JL Collins The Simple Path to Wealth. He is an American investor who basically goes all-in on funds that track the enormous US share market. Which is what this new NZG fund is doing, tracking OUR share market.
BUT, we are not in the US (thank freaking GOODNESS) and our share market is tiny in comparison. Tiny. I’ve mentioned before that the only individual company shares I own are Meridian Energy, the rest of our investments are in ETF’s, KiwiSaver and cash. What happened to Meridian in early July? Their biggest customer Tiwai Point Aluminium Smelter announced its impending closure and the share price dropped. In early Feb our investment was worth about $35,000. When the closure announcement was made it dropped to about $27,000. At the time of writing it’s recovered to be worth about $29,000:
1 year price history for Meridian Energy
Image source: nzx.com
Therefore, with the two biggest companies Fisher & Paykel and a2 Milk making up 30% of the NZG fund, to me, it just makes me feel too vulnerable and overexposed to be in just two companies because I am feeling first hand what that is like. COVID has taught me a lot and one of those things is the need for diversification because even the strongest companies can have the rug pulled out from under them. Think about Tourism Holdings for a moment, their share price plummeted, who would have thought our tourism industry could be so badly hit? Fisher & Paykel Healthcare, on the other hand, have had a huge increase in value.
If I asked myself back in January 2020 what the sharemarket situation would have been in July 2020 I could never have picked this, no one could, so that’s why the status quo remains for me and I won’t be switching out of one fund and going into another. But I will instead file it away for future reference. Instead, I’ll just keep watching, reading, talking and learning more about how to invest in a way that’s appropriate for my situation and for my family.
And finally…
I mentioned at the start that I found it difficult to find information about these two Smartshares ETF’s to help me write this post. The thing is, the Smartshares website just does not have an ‘education’ component to it that I’ve become used to getting via other investment sites, theirs is a very simple site which just offers the product. Of course, I just contacted them directly to help me out (which they were happy to do), but would you do that? It’s unlikely.
In my view, that lack of information just puts people off investing. That’s why I’m putting a mention at the end of this post to some other fund providers. There is Kernel, Hatch and Sharesies (leave a comment below if you want to add a site worth mentioning) and each produces content packed full of useful information directly related to ETF’s and Index funds (including what the difference is!). They are the “new school” of investment providers coming through. So, if you are looking for more I encourage you to pour yourself a coffee and go and check them out and start to educate yourself so you can make an informed decision yourself.
CRIKEY! That turned out to be a bit of an epic post! Well done for reading to the end!
I’m exhausted!
