We all know Index funds are a very smart way to invest, they give us instant diversification, are super easy to buy and manage, and have rock bottom management costs. It also makes it easy to choose what markets and assets we want exposures to, making them a very useful tool to structure our portfolio according to our individual circumstances. So what does Scott Pape the Barefoot Investor think of them?
What does the Barefoot Investor think of Index Funds?
Turns out The Barefoot Investor thinks index funds are great. Actually, one of his favourite investment firms and one he recommends everyone starts with when they buy shares is the Australian Foundation Investment Company – AFIC, which is a solid company which is actually my oldest holding too. Although, if we are getting technical here, AFIC isn’t an index fund, but it sticks pretty darn close to the index and it also has pretty low fees. I prefer to call it an ‘old school granddaddy LIC’!
The Barefoot Investor has actually designed a couple of index based portfolios over his time, which he has distributed to his readers. Whilst he has dabbled in stock picking and provided a subscription stock tip service for some time which is pretty dodgy, he has since cleaned his act up. He is now providing free financial counselling through his charity to some of the most vulnerable Aussies, which I think is a very noble thing to do, and completely makes up for his previous stock-tipping-dogdgyness.
He initially suggested the Barefoot ‘Breakfree portfolio’, and has since revised this and called it the Barefoot ‘Idiot Grandson Portfolio’
The Barefoot Index Breakfree portfolio
The Breakfree portfolio was a portfolio designed by the Barefoot Investor which enabled you to breakfree from having to be dealing with your portfolio all the time. It is a fairly simple portfolio which predominantly includes Vanguard ETFs.
- Australian Bluechip Shares: STW – 35%
- Australian Small companies: VSO – 15%
- Global Bluechip Shares: IOO – 20%
- Australian Property securities: VAP – 20%
- Australian Fixed interest: VAF – 10%
The Barefoot investor suggests re balancing once a year in the following ratios
State Street Global Advisors (SSGA) are the fund manager for STW which seeks to track returns according to the S&P ASX 200 fund (ASX:STW). The MER is .13% and since April 2020 their 1, 5 and 10 year returns have been -17.96%, -2.14% and .71%.
The Barefoot Investor recommends holding the bulk of your portfolio (35%) in STW to concentrate your returns on the majority of blue chip Aussie stocks. These pay good dividends (approximate current dividend yield of STW is 6%) with Quarterly dividends that are approximately 70% franked.
Australian Small companies ASX:VSO
Vanguard MSCI Australian Small Companies Index ETF (ASX:VSO) seeks to track the MSCI Australian Shares Small Cap Index. With a MER of .3%, its one of the more expensive ETFs, and as of March 20 its 1,3 and 5 year returns are -21.24%, -1.81% and 1.84%.
The Barefoot Investor recommended holding 15% of your Breakfree portfolio in VSO to diversify within the Australian share market sector, weighting your portfolio to small size companies which have been shown to provide higher risk but higher reward. For example, during COVID-19 a number of these small-cap stocks have suffered greatly, and many smaller businesses have even gone bust.
The BlackRock iShares Global 100 ETF (ASX:IOO) is an ETF which tracks the Global S&P 100 index. It has a fairly high MER of .40%, and its 1, 5 and 10 year returns (as of April 2020) have been 7.14%, 10.01% and 13.17%.
The Barefoot Investor recommends 20% portfolio exposure to global bluechip shares to spread your investment risk out of Australia and diversify into some of the worlds biggest companies like Microsoft, Apple, amazon and Nestle.
Australian Property ASX:VAP
Vanguard Australian Property Securities Index Fund (ASX:VAP) tracks the Standards and Poor’s ASX 300 A-REIT index (Australian Real Estate Investment Trust). Its one year return is -31.39% (OUCH), 3 year return is -4.88% and 5 year return is .39% (as of March 2020). The management fee is .23% –
This portion is to provide investors exposure to the Australian property market to provide diversification into a non correlated asset class. The Barefoot Investor recommends to hold 20% of VAP in the breakfree portfolio.
Australian Fixed interest ASX:VAF
The Vanguard Australian Fixed Interest Fund ETF (ASX:VAF) seeks to track the benchmark of the Bloomberg AusBond composite 0+ year index. As of 31 Mar 20, the 1, 3 and 5 year returns have been respectively 6.67%, 5.58% and 4.09%. This has a management fee of 20 basis points (.2%).
This portion is suggested to be 10% of the portfolio, and exposure to Fixed Interest bonds seeks to reduce volatility in the Breakfree portfolio
The Idiot Grandson portfolio
Since releasing the Break-free portfolio, the Barefoot investor has had another closer look at index funds in general. He started by looking at over 315 different index style funds – a combination of 201 true index tracking Exchange Traded Funds and also 114 index inspired Listed Investment Companies, and whittled them down to a final list of ten potential index funds worthy of investing in.
Barefoot Index fund First pass
The first iteration of the Barefoot idiot grandson index fund portfolio looked at over 315 individual funds (no I will not list them here LOL!) and cut them down based on Management costs.
Management costs are a massive deal and you only need to play around with compound interest calculators to work out why. Paying a 1% management fee doesn’t sound like much, but in the long term (30 years) when dealing with stocks for the average investor, this can add up to hundreds of thousands if not millions of dollars.
It is known that on average, investors have up to 40% of their investment returns gobbled up due to high management fees and charges.
The first pass cut away any index fund with a Management Expense Ratio above .40%, or $4 per every $10,000 invested each year.
This cut the list down to 60 ETFs and 10 LICs to choose from (and no I wont list them, there is STILL too many).
Barefoot Index fund Second pass
The second pass analysis of the Barefoot Idiot Grandson portolio of index funds cut away funds based on undesirable fads and those that contained risky financial products like synthetics and derivatives. These are second or even third order financial products which don’t actually track or represent underlying holdings, but rather are a gamble or speculation on how their prices move – for more detailed explanation watch the movie ‘The Big Short‘
The second pass also removed any ‘outliers’ such as funds geared towards producing really high dividends. High dividend stocks often suffer in terms of total return due to a lack of capital growth, a form of dividend trap. It should be both dividend yield and capital growth that should be considered together.
The second pass similarly removed small company funds (which was ironic as we were recommended to buy these in the form of Vanguards ASX:VSO fund in the breakfree portfolio). Similarly, equal weight portfolios were discarded. These are portfolios which include the same dollar or percentage value of all the stocks they hold, which by definition gear a portfolio more heavily toward small caps than a typical index fund.
Finally, in a move which could be considered a one finger salute to Investing legend Peter Thornhill (who loves industrials), all industrial funds were also dropped.
This left only 6 Listed Investment Companies and 13 Exchange Traded Funds to choose from.
Barefoot Index fund Third pass
The barefoot index fund third pass cut the remaining 19 index style funds down to just 10 by considering the management style of the funds. This pass was more of a judgement call, where the Barefoot opted for funds owned and run purely to benefit its share holders (not for profit funds) such as Vanguard.
This is because they have the lowest Management Expense Ratio and the management themselves are shareholders, meaning they make decisions and act in the shareholders best interest.
Personally I was a bit miffed that BetaShares A200 didn’t make the cut since thats something I invest heavily in, instead of Vanguards VAS fund. Without further-ado, here is the list.
Barefoot Idiot Grandson Index portfolio: Australian LICs
- Australian Foundation Investment Company (ASX:AFI) MER = .14%
- Milton investment corporation (ASX:MLT) MER = .12%
Argo Investments (ASX:ARG) MER = .16%
- AUI: Australian United Investment Company
- DUI: Diversified United Investment Company
Barefoot Idiot Grandson Index portfolio: Australian ETFs
- Vanguard Australian shares top 300 (ASX:VAS) MER = .10%
Whilst not one of the Barefoots reccomendations, I sold my VAS holdings and instead opt for Betashares Australian top 200 index fund (ASX:A200) MER = .07% due to the lower management costs.
Barefoot Idiot Grandson Index portfolio: International ETFs
- Vanguard Total world ex US (VAS:VEU) MER = .09%
Vanguard Total US Market (ASX:VTS) MER =.03%
- VGAD: Vanguard MSCI Index International Shares (Hedged) ETF
- VGS: Vanguard MSCI Index International Shares ETF
The Barefoot Idiot Grandson Index portfolio
His final thoughts – The sheer power and simplicity of the Exchange traded fund trumps all. Pick whatever index funds you want from his third pass, and put them in these percentage allocations…
- Australian total share market index fund: 75%
- US total share market index fund: 10%
- Global ex US total share market index fund: 15%
How I use the Barefoot Idiot Grandson Index fund Portfolio
The Barefoot Idiot Grandson Index portfolio could be cheaply and simply constructed using a split of A200 / VTS / VEU – interesting that this has been the core of my investment holdings and my financial independence investment strategy for some time!
Of course, the barefoot investor suggest you could use any index funds from his final ‘third pass’ to meet this asset allocation, and I also personally do invest in some Australian Listed Investment Companies which is probably due to ‘home bias’ and increases my concentration risk in the Australian economy (but its good to know the Barefoot Investor does, too!)
Betashares A200 ETF aims to track the Solactive Australia 200 index, that is the top 200 Australian publicly traded companies by market cap. This is effectively the biggest bluechip Australian stocks. It has a MER of .07% and as of March 2020, its 1 year return has been -14.56% (exactly the same as the index it tracks).
Check out the detailed review: Betashares Australian top 200 index fund (ASX:A200) MER = .07%
Vanguard US total stock market index fund (ASX:VTS)
Vanguard US Total Market Shares Index ETF (ASX:VTS) tracks he CRSP US total Market Index (approx 3500 stocks) with a MER of .03% it is one of (if not the) cheapest ETFs on the market, and its 1, 3 and 5 year returns as of March 2020 are 5.32%, 11.91% and 10.53%
Check out the detailed review: Vanguard Total US Market
Vanguard World ex US total stock market index fund (ASX:VEU)
Vanguard All-World ex-US Shares Index ETF (ASX:VEU) tracks the FTSE all world ex US index. Its MER is .08% and as of March 20 its 1, 3 and 5 year returns are -2.25%, 5.33% and 4.01% respectively.
Check out the detailed review: Vanguard Total world ex US
Aussie Listed Investment Companies
I also check out these LICs, and if any of them are trading at a juicy discount (or discount delta to be more precise) then I load up on them. If they are trading at fair value or at a premium, I just stick to the above ETFs.
- Australian Foundation Investment Company (ASX:AFI) MER = .14%
- Milton investment corporation (ASX:MLT) MER = .12%
- Argo Investments (ASX:ARG) MER = .16%
- Brickworks investments (ASX:BKI) MER = .10%
Other Barefoot Investor Index funds
Other than the break-free portfolio and the idiot grandson portfolio, the Barefoot investor recommends you look into researching the following index funds in his article Four ETFs to add to your portfolio;
- S&P Global 100 Index i-shares Fund
- SHARES MSCI Emerging Markets Index Fund
- The S&P GSCI Commodity-Indexed trust
- The i-shares S&P Global Technology Sector Index Fund
Summary of Barefoot Investor Index funds
Index funds are not just a fad, they are a sensible tool which can be used in every investors portfolio to diversify holdings and reduce risk. I think some of these index funds the Barefoot Investor has recommended are great, and I transitioned to an index style portfolio many years ago in an effort to simplify my life and investments, whilst also maximising my returns and decreasing my long term risk
I have owned or currently own AFI, MLT, BKI, ARG, VAS, A200, VTS, IVV and VEU. Index fund ETFs and Index style LICs make up my entire portfolio. Since adopting the index style investing approach I have simplified my portfolio again (recently sold IVV and VAS and rolled funds into A200). I am now long (holding for the long term) on the following index fund ETFs: A200, VTS and VEU.
I am also long on the following index style LICs: AFI, MLT, ARG and BKI, however I am evaluating whether the increased management fees, active management risk and extra paperwork (admin burden) is worth keeping them – my alternative would be to sell them and roll the funds over into the A200/VTS/VEU split.
For now I am continuing to invest in line with my Financial independence investing strategy and buying one of these four LICs if they are trading at a good discount to their NTA (or discount delta) – if nothing is on sale, then I just load up on the ETF index funds with a strong bias toward Aussie shares for the benefit of franking credits (accepting the concentration risk into the Aussie economy).
Accounting to track index funds
The beauty of index funds really lies in the fact that a handful of holdings can literally give you global diversification to every single blue chip stock. You don’t need some crazily complicated spreadsheet that tracks thousands and thousands of companies. I started using excel spreadsheets to track my index fund holdings, but it quickly became an unwieldy beast and overwhelmed me.
I discovered Sharesight which is a free accounting tool designed specifically for those on the path to Financial Independence that invest in index funds. Finance professionals and companies often use a paid Sharesight subscription in their ‘backend’ which helps them manage massive amounts of data (such as multiple client portfolios etc), but for you and me, we can use Sharesight completely FREE because we have under 10 holdings. The free account is more than enough for the average person, but you can upgrade to a paid subscription which gives you some more features.
Check out my detailed review of how I use Sharesight to manage my index funds, or Captain FI readers can actually get this bonus sign up offer which gives them four months of premium for free if they ever feel the need to upgrade
How to buy the barefoot investor index funds
Buying the barefoot investor index funds and building your own portfolio is super simple using SelfWealth; check out my comprehensive review of SelfWealth here, and you can click the image below for an affiliate sign up bonus worth over $100 which includes 90 days premium subscription and 5 free trades!