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Reply to letter of the week - Eureka Report item

August 13, 2008
Letter of the week
By subscriber Marcus Moore

Is there a difference between Vanguard's managed fund, which attempts to replicate the ASX 200 and the stockmarket traded share from State Street, SPDR S&P/ASX 200 Fund (ASX:STW)?

Are there particular merits in either product or are they really much the same in terms of price, dividends, 'management fees', net tangible assets, etc?

Also, are there other ASX 200 index-type funds out there that I'm missing?

- Marcus Moore

Scott Francis responds: Both the Vanguard index fund and the State Street Exchange Traded Fund (ETF) you mention look to capture the return from the ASX 200 index. The ETFs tend to be a little cheaper than something like the Vanguard retail index fund, and quite a lot cheaper than some of the other index funds mentioned in the article.

ETFs are a more recent addition to the investment landscape in Australia, having really taken off overseas. State Street's website details its offerings.

I have direct index funds and ETFs in my own portfolio, with more index funds than ETFs.

One issue that I try to look at closely is the tax-effectiveness of portfolios. Both the Vanguard index funds and State Street ETFs seemed to have reasonably modest income distributions, which make the investment more tax-effective.

After-tax returns are crucial to investors. While the Vanguard website provides after-tax investment returns, the State Street ETFs did not seem to. This would be very useful information in comparing the two options.

There are also CFDs (contract's for difference) that offer index exposure to markets. These provide a low-cost option, however the "counterparty risk" - which means if the issuer of the CFD got into financial stress then the CFD investment may be at risk - makes them unsuitable, in my opinion.