Ah, the famous Barefoot Investor index funds! We all know index funds are a method of stock market investing, so what share market index funds does the Barefoot Investor buy? Read on to find out exactly what and how to create your own Barefoot Investor index fund portfolio.
Topics: Barefoot Investor index funds – Barefoot Investor shares – Barefoot Investor ETFs
Exchange-Traded share market Index funds, or ETFs for short, provide diversification, are easy to buy and manage, and most have very reasonable (low) management costs (management expense ratios).
They make it easy for investors to choose what markets and assets they want exposure to, making them a useful tool to structure a portfolio according to an individual’s personal circumstances and preferences.
So, what does Scott Pape the Barefoot Investor think of index funds, and what are the barefoot investor index fund portfolios?
- Outperforms actively managed funds over the long term
- Passive investment – no time required to actively manage
- No experience required
- Fewer trading decisions required
- Lower fees than actively managed funds or all in one funds
- Can tailor each ETF weighting to suit your personal preferences
- Need to manually rebalance these portfolios over time
- Higher brokerage costs than an ‘all-in-one’ ETF
- Limited exposure to small-cap companies
- You can still stuff it up if you don’t know what you are doing
- Not appropriate to everyone’s circumstances
- Share market volatility means they can go down in value
Introduction to the Barefoot Investor index funds
This article will explore what the Barefoot Investor thinks of index funds, and explores some of the index fund portfolios he has created and invested in, such as the Breakfree Portfolio, and the Idiot Grandson Portfolio, including his recommended Barefoot Investor ETFs. The article then explores the practical side of things – how I take Barefoot Investor index funds recommendations and actually construct and manage a portfolio. I cover:
- How I have constructed my portfolio using the A200, VTS and VEU index funds
- How I use Pearler to buy the Barefoot Investor index funds, and how I rebalance the portfolio using the Autoinvest feature
- How I track and manage my portfolio using Sharesight.
However, you shouldn’t just blindly follow what the Barefoot Investor says or copy what I do with my money, and you need to do your own thorough independent research (including reading things like the PDS), and consider holistically your financial needs such as risk tolerance, investment time frame/horizon, emergency funds, insurance requirements etc. If it’s starting to sound complicated and overwhelming – think about going to see a licensed financial advisor.
Who is the Barefoot Investor?
Well, unless you’ve been living under a rock, you’ll know that the Barefoot Investor is Australian Scott Pape. Self-proclaimed as “Australia’s favourite money guy”, he provides no-BS personal finance advice and recommendations, and recently re-trained as a not-for-profit financial counsellor.
While he recently closed the Barefoot Investor Blueprint which contained his Barefoot Investor shares recommendations and Barefoot Investor ETF recommendations, he did provide some further recommendations – which I’ll get into later.
What does the Barefoot Investor think of index funds?
Well, it 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. This is a solid company that was my first share purchase.
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 designed a couple of index-based portfolios over his time, which he has distributed to his readers. While he has dabbled in stock picking and used to provide a subscription stock tip service, 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-dodgy-ness.
He initially suggested the Barefoot ‘Breakfree Portfolio’, and has since revised this and called it the Barefoot ‘Idiot Grandson Portfolio’.
I’ll get into both of these portfolios in this article and explain what each includes.
The Breakfree Portfolio was designed by the Barefoot Investor with the idea of “breaking free” from dealing with your portfolio all the time. It’s a fairly simple portfolio that 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
Want to make more money to invest?
After releasing the Breakfree Portfolio, the Barefoot Investor took 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 (LICs), 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 Investor 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 (MER) above 0.40% (which equals $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 won’t list them, there is STILL too many)..
Barefoot Index fund second pass
The second pass analysis of the Barefoot Idiot Grandson Portfolio 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 that 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. 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 Vanguard’s 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 Australian industrials), all industrial funds were also dropped. You can interpret that how you wish but I am not sure why the Barefoot Investor has done that.
This left only 6 LICs and 13 ETFs to choose from.
Barefoot Index fund third pass
The Barefoot Investor 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 Investor opted for funds owned and run purely to benefit its shareholders (not-for-profit funds), such as Vanguard.
This is because they have the lowest MER 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 that’s something I invest heavily in (I suspect it’s because the Barefoot Investor doesn’t like BetaShares), instead of Vanguard’s VAS fund.
So, without further ado, here is the final list of the recommended Barefoot Investor shares that make up the Idiot Grandson Portfolio.
Barefoot Investor Idiot Grandson Portfolio: Australian LICs
- Australian Foundation Investment Company (ASX:AFI) MER = .14%
- Milton investment corporation (ASX:MLT) MER = .12% – Taken over by Washington H. Soul Pattinson WHSP (ASX:SOL)
- Argo Investments (ASX:ARG) MER = .16%
- AUI: Australian United Investment Company (ASX:AUI) MER = 0.12%
- DUI: Diversified United Investment Company
Barefoot Investor Idiot Grandson Portfolio: Australian ETFs
- Vanguard Australian shares top 300 (ASX:VAS) MER = .10%
Barefoot Investor Idiot Grandson 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 Investor Idiot Grandson Index Portfolio
As the Barefoot Investor says, the sheer power and simplicity of the exchange traded fund trumps all. Pick whatever index funds you want from this 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 Investor Idiot Grandson Portfolio
The Barefoot Investor Idiot Grandson 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 suggests you could use any index funds or from his final third pass to meet this asset allocation. My personal investing preferences have evolved somewhat over time,
If you’re already familiar with my investment strategy, then the below won’t be a surprise to you – I focus on making money online and then investing that into a diversified portfolio of index funds, property and reinvesting some into my websites, but I thought I’d focus here just on my index fund investing strategy to show how you also can create something similar to the Barefoot Investor’s strategy.
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 blue chip 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 my detailed review: BetaShares Australian top 200 index fund
Vanguard US total stock market index fund (ASX:VTS)
Vanguard US Total Market Shares Index ETF (ASX:VTS) tracks the 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 my 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 my detailed review: Vanguard Total world ex US
Aussie Listed Investment Companies
I don’t choose to invest in LICs anymore, but these are ones that I have previously invested in. If this is something you are considering, you can use these review articles as a starting point for your own research or a discussion with a financial advisor to see if they are suitable for your own circumstances.
- Australian Foundation Investment Company (ASX:AFI) MER = .14%
- Milton investment corporation (ASX:MLT) MER = .12% Taken over by Washington H. Soul Pattinson WHSP (ASX:SOL)
- Argo Investments (ASX:ARG) MER = .16%
- Brickworks investments (ASX:BKI) MER = .10%
How to buy the Barefoot Investor index funds
Alright, so that was a lot to get through, I know. But now hopefully you have a good idea about what the Barefoot Investor index funds actually are.
Buying the Barefoot Investor index funds and building your own portfolio can be easily done using pretty much any online share trading platform. Check out my Pearler review (This is the broker I currently have my Barefoot Investor Index Fund portfolio with).
I personally like the security and peace of mind that comes with using a CHESS sponsored broker in Australia.
Once you have a brokerage account opened, buying the Barefoot Investor index funds to set up your own portfolio is actually super simple – its just a matter of choosing the funds you want to invest in, and buying them in the ratio you have decided on.
Tracking your Barefoot Investor index funds
The beauty of index funds really lies in the fact that a handful of holdings can literally give you global diversification to not only every single blue chip stock, but also small caps and emerging markets.
But luckily 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, a free accounting tool. Finance professionals and companies often use a paid Sharesight subscription to help 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 thisbonus sign up offerwhich gives you four months of premium for free if you do upgrade.
Summary of Barefoot Investor Index funds
After trying to stock pick, value invest, and time the market I eventually transitioned to the Barefoot Investor Index Fund portfolio in an effort to simplify my life and investments, whilst also trying to maximize returns and decrease long term risk. However, as with any investment, it may not be appropriate for everyone, and you certainly need to do your homework and consider whether it is right for you.
Want to learn more about the Barefoot Investor?
Check out the Barefoot Investor’s award winning books
The Barefoot investor
Scott Pape’s original book the barefoot investor is a great read and highly reccomended.
The Barefoot investor for families
The barefoot investor for Families is Scott’s second book, with a focus on how parents can educate their kids and teach them the value of a buck
The Barefoot investor for kids
Scott Pape wrote this third book recently, the Barefoot Investor for kids. If you want the kids in your life to be good with money, hand them this book. Teaching kids about money isn’t easy – so let Scott Pape do it for you. His books have sold millions of copies and counting.
- Scott Pape (Author)
- English (Publication Language)
Check out the following reviews on brokers that offer online trading to buy Australian and international shares. As always, make sure you are fully educated before making a choice on any particular one.
Big 4 banks
- CommSec Share trading [this is who I started out investing with]
- NAB Trade
- ANZ Trade
- Westpac Trade
Fintechs and smaller banks
- Pearler [This is who I currently invest through]
- CMC Markets
- IG MarketsGroup
- Interactive Brokers
- Tiger Brokers
- Moo Moo
- Bell Direct
- Bendigo Invest Direct
- SpaceShip – A pooled investor micro-investing app
- Raiz Invest – An awesome tool that lets you ’round-up’ your purchases to the nearest whole amount and invest the difference
- CommSec Pocket – CommBank’s response to micro-investing tools
- Stake – A cool investing tool that lets you shop for more than 3,500 American shares and ETFs with zero brokerage fees
- Pearler Micro – Pearlers Micro investing tool that lets you invest into 8 ETF based funds using Auto invest and roundups.
- Stockspot – A Roboadvisor which automatically invests your money into a mix of ETFs (Shares, Bonds, Cash and Gold) according to your personal situation and risk tolerance
- Six Park – A Roboadvisor which automatically invests your money into a mix of ETFs (Shares, Bonds, Cash, Infrastructure, Property) according to your personal situation and risk tolerance
Financial Disclaimer: CaptainFI is NOT a financial advisor and does not hold an AFSL. This is not financial Advice!
I am not a financial adviser and I do not hold an Australian Financial Services Licence (AFSL). In this article, I am giving you factual, balanced information without judgment or bias, to the best of my ability. I am not giving you any general or personal financial advice about what you should do with your investments. Just because I do something with my money (or use a particular service or platform) doesn’t mean it is automatically appropriate for your personal circumstances. I do not recommend nor endorse any financial or investment product, and my usage or opinion of any product should not be interpreted as an endorsement, advertisement, or intent to influence.
I can only provide factual information based on my journey to Financial Independence, and that is provided for general informational and entertainment purposes only. I make no guarantee about the performance of any product, and although I strive to keep the information accurate and updated as it changes, I make no guarantee about the correctness of reviews or information posted.
Remember – you always need to do your own independent research and due diligence before making any transaction. This includes reading and analysing Product Disclosure Statements, Terms and Conditions, Service Arrangement and Fee Structures. It is always smart to compare products and discuss them, but ultimately you need to take responsibility for your use of any particular product and make sure it suits your personal circumstances. If you need help and would like to obtain personal financial advice about which investment options or platforms may be right for you, please talk to a licensed financial adviser or AFSL holder – you can take the first steps to find a financial advisor by reading this interview, or by visiting the ASIC financial adviser register and searching in your area.