Under the label Smartshares, the NZX has grouped three "exchange traded funds" that it runs: TENZ, MIDZ and MOZY.
TENZ and MIDZ have been trading on the stock exchange for several years, although the NZX has now bought MIDZ from stockbroker ABN Amro Craigs.
MOZY is, however, new. You can invest in it via an initial public offering between August 23 and September 17, or via the stock exchange after late September.
All three are index funds, which hold the shares in a market index. TENZ, for example, tracks the NZSX 10 Index of the ten biggest shares. Telecom is biggest in the index and also in TENZ. Next come Carter Holt Harvey, Contact Energy and so on.
MIDZ tracks the NZSX MidCap Index of the 11th through 50th biggest shares. And MOZY will track the S&P/ASX MidCap 50 Index of the 51st through 100th biggest Australian shares.
Investing in index funds is an easy way to get into a wide range of companies. And that diversity is good. If some shares do badly, others will probably do well.
There are two other index funds listed on the stock exchange but not run by NZX: AMP Capital Investors' WiNZ (international shares) and Tower's Tortis Ozzy (guess where!). There are also several that aren't listed, but are run like non-index share funds, usually called "active" funds.
All index funds, listed or not, have some distinct advantages over active share funds:
- They are cheaper to run, so their fees are lower.
This is largely because they don’t pay people to decide which shares to buy and sell. Also, they trade less, so they save on brokerage.
- They perform better than most active share funds - especially after fees.
An index fund always performs as well as the market sector covered by its index - minus a little for management costs. MIDZ, for example, performs about as well as the middle market.
In any year, half the active funds in that sector will perform better than average, and half worse.
But the following year, many will move from good to bad or the reverse. Over time, only a few active funds keep outperforming. And, given that they charge relatively high fees, even fewer outperform after fees.
If we knew in advance which active funds would do best, we should invest in those. But we don't. Sticking with an index fund - which we know will come perhaps a quarter of the way down - is better than going for top spot but ending up last.
For the above two reasons, I have invested in index funds since I lived in the US in the 1980s, and have never regretted it.
But in New Zealand, index funds have another advantage over actives. They don't pay tax on their capital gains.
Over many years, this can make a huge difference. In some scenarios, after 30 years you could accumulate more than twice as much in a tax-exempt fund, all else being equal.
That seals it for me.
Like all share investments, index funds are too volatile for short-term investing. But if you've got ten years or more - and you're sure you won't pull out early when the fund drops in the shorter term - they are a great idea.
