The talk around the personal finance water-cooler is that you should invest in low-cost index funds, such as the NZX50, S&P500, and the Vanguard fund offered by InvestNow. But how many people who are invested in these funds actually know what companies they are investing in? Either directly, or indirectly?
In reality, when I invested in them really only knew a little about each. I knew that the NZX50 was tracking the biggest 50 NZ companies, or that the S&P500 was tracking the biggest 500 companies in the US. And that Vanguard had a huge list of different company shares. And they are all relatively low fees for New Zealand. That’ was the extent of my knowledge.
Now, you might say that if you have a well-diversified index fund it doesn’t really matter what the underlying index or fund is made up of. And you would be right to some degree. That’s the entire point. With these funds you are avoiding having to do any research into the underlying companies, rather your aim is to be exposed to the entire market to capture market moves. Entirely passive one might say.
The Vanguard fund, for example, has over 1500 different companies in it. Surely all those companies aren’t in the same industry- so it is well diversified. But, what if one of those 1500 companies that make up the fund accounts for a large percentage of the entire fund? Would it be well diversified then?
For a matter of interest, and to ensure that you haven’t doubled up two different funds, you should have a look what the underlying fund or index is made up of. So let’s do that now for the NZX50, S&P500, and the Vanguard fund offered by InvestNow.
The NZX50 Index is the main stock market index in New Zealand. As I mentioned earlier, it comprises the 50 biggest stocks by market capitalisation (market value) trading on the New Zealand Stock Market. So what sectors are these companies in?
Health care, utilities, and industrial make up more than 50% of the NZX50 with companies such as Fisher & Paykel Healthcare, Auckland Airport, and several power companies.
There are also several smaller sectors in the NZX50 such as IT and finance. The top 10 companies in the NZX50 are as followed;
The S&P 500, also known as just the S&P or US500, is an American stock market index based of the 500 large companies having stock listed on two stock exchanges, either the NYSE, NASDAQ, or the Cboe BZX Exchange.
IT, health care, and finanical sectors make up more than 50% of the S&P500. The sector weighting is shown below;
The top 10 companies in the S&P500 are big names that you would have heard of. Companies like Microsoft, Apple, and Amazon. Below is a list of the ten largest companies in the S&P500.
The Vanguard fund from InvestNow has many of the world’s largest companies from major developed countries. In fact, it has over 1500 companies in it. It’s low-cost, at only 0.2%, and excludes companies involved in the tobacco, controversial weapons and companies that deal with nuclear weapons. The Fund is in Australian dollars so the value of the Fund can be affected by currency fluctuations. There is a hedged version of the fund in NZD thought.
If you look at the top 10 companies, they are basically the same top 10 companies as in the S&P500. The only difference is Vanguard has Nestle SA, and Visa, and doesn’t have Berkshire Hathaway.
The Vanguard fund is heavily weighted in US companies at about 64%. The remaining 34% is split over other major developed countries.
And the Vanguard fund is diversified over many different sectors, with information technology and finance being the two biggest sectors.
Looking at the make up of Vanguard and the S&P500 shows you that a large proportion of the Vanguard fund is basically the S&P500. So in reality, you don’t need to invest in both the Vanguard and S&P500.
Investing in the Vanguard fund and the NZX50 allows you to be exposed to every major developed country in the world, with the exception of Australia. So it’s a good option for where to start with index investing.
I’ve often read that the vanguard fund and S&P500 funds were the same, but I still had money invested in both. Now that I have looked into it, I will stop investing in the S&P500- mainly for the fact that the Smartshares US 500 Fund has a fee of 0.34% compared to the 0.2% of Vanguard.
I should say, before you decide that you want to invest in the NZX50, S&P500, and the Vanguard fund, you should get your emergency fund sorted- you never know what might happen.