As a new mother I have experienced a world entirely new to me. Other than the continuous lack of sleep, never have I been exposed to so much advertising and marketing on all the different baby products my child “absolutely, positively” needs. Gasp! In some ways, the marketers of these products appear to be suggesting that you are a bad parent if your child does not have the latest toys or designer clothes or that your little ones will be social pariahs in the sand pit at childcare without them!
Don’t get me wrong, I love being a parent and I would never give that experience away for all the holidays in the world, but where I get frustrated, is the idea that expensive equals better. My personal view is that where I can get a product that does essentially the same thing as an alternative and which is of equal quality for a more cost-effective price point, it makes sense for me to do that. For example, a pair of baby socks is the same to me whether it is from Target or from Armani Junior.
So how does this relate to investing?
Constructing a portfolio is made up of several inputs. ETFs, single company shares, actively managed funds are examples of these inputs and they all serve a purpose to, hopefully, add value to your portfolio in different ways. Active managers can be more expensive compared to passively managed options, however their ‘value add’ may be the portfolio manager’s experience in mitigating risk, stock picking or accessing complex asset classes or strategies. To bring this back to my baby essentials analogy, perhaps the example here is a really high quality pram. I may be willing to pay more for a premium product even though there are cheaper items available on the market – how else would I make sure there is space for my double-strength takeaway cappuccino! But when it comes to broad market Australian market cap index equity exposure, this comes back to my baby-sock comparison. There are many exposures in the market with similar offerings- so what should be the consideration here? I would most likely say primarily cost.
When BetaShares launched our Australia 200 ETF, which is the lowest cost market cap broad market Australian equity exposure at 0.07%p.a. management fee, we were immediately asked how this fund differed from similar exposures that were charging up to double the fees. The answer was that we searched for efficiencies in all aspects of the product development chain. For example, the index provider we are using offered a very competitive cost structure compared to other index providers and as such we have been able to pass on that cost saving to our investors. I’m certainly not saying that cost is the bar against which all ETFs are measured, given funds have varying underlying exposures and structures. It is important however, to know exactly what you’re paying and what you’re getting, when it comes to your investment portfolios and, should you need them – baby socks.