Welcome to my column, Young & Invested where I discuss personal finance and investing for Gen Z and Millennials. This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.

Edition 8

In my day to day, I often get asked for investment advice when I least expect. I get asked about shares at the dinner table. I find myself being enthusiastically questioned on the merits of bitcoin at my doctor’s appointment.

I begin with a large disclaimer, followed by some general advice about Morningstar’s best picks and the macro-outlook. “But I’m not sure and you should do your own research” is how I usually conclude those interactions.

However, recently this turned into a request from my younger sister to invest on her behalf as I see fit. The money I was entrusted with was the accumulation of almost five years of savings – no pressure.

Being handed someone’s life savings is certainly a unique position, however a Morningstar study shows family influence on investment decisions is much more common than some realise. It was found that almost 40% of investors consider their family, relatives or friends as sources of financial advice.

sources of financial advice
Figure 1: Potential sources of financial advice. Source: Morningstar Investments. 2022.  

Advising family on money matters always comes with an extra level of apprehension as any subsequent losses become a shared tragedy.

Rather than rejecting the offer, I sat down and decided to think this through methodically. I often invest my own money with a reasonable amount of confidence – what made this different?

Goal and strategy

Every investor wants the highest returns for their portfolio. However, having a defined goal will inform the strategy you use to achieve this. Before you even create a trading account, it is essential to know your goals and investment strategy. Morningstar provides an abundance of resources to guide you through this process.

Like most young people who aren’t actively engaged in the stock market, my sister’s savings have been accumulating in a high interest savings account (“HISA”) with her local bank. However, after the recent interest rate cut, banks have been slashing rates on savings accounts, increasing the allure of returns through the stock market.

Young investors tend to gravitate to the market with a ‘get rich quick’ mentality. As alluring as it can be to deep dive into YouTube conspiracies and inspect candlestick charts, it doesn’t get you far (I’d know). This poor behaviour is exactly what I want to avoid when investing for both myself and others.

With no short-term withdrawal requirement and an approximate 10-year horizon allowing me a reasonable amount of flexibility. At an 8% return over 10 years, she could double her principal investment without any further investments required. Alternatively, this same amount sitting in a HISA at an average bonus rate of 4% would net a total of ~$14.8k over the same period.

Since this is going to be a one-time, lump sum investment and I am not being renumerated for the time I spend, a high-level ‘set and forget’ strategy works best. The primary goal here is to develop long term returns that are higher than inflation with dividends not being a priority. In many ways, create a better alternative to a HISA to hold her funds until she may want to withdraw them.

Asset class considerations

There are several ways I could have gone about this. Admittedly, I was inclined to pick a handful of equities that were undervalued in every sector and distribute equally by dollar amount. This approach is nothing groundbreaking, but ultimately, I tabled that idea after deciding to simplify this process further by taking the work out of my hands.

There are undoubtedly benefits to individual securities and they hold a place in portfolios along with collective investment vehicles. In a previous article, I explained why I don’t invest in individual shares anymore with a preference for ETFs. I took a similar approach here.

Equities are often considered the most growth-centric asset allocation. Morningstar’s ‘Aggressive’ ETF model portfolio (9+ years minimum investment) has a 90% skew to growth assets like international and domestic equities, as well as property and infrastructure. The remaining 10% lies in fixed interest and cash holdings. Since the portfolio I am trying to build is intended for a ‘non-investor’, I want to make it as simple as possible and stick to ETFs with an equity focus.

Active or Passive ETFs?

Active funds are run by managers who buy and sell instruments aiming to outperform an index or meet another objective. On the other hand, passive funds aim to simply mirror the performance of an index. These two approaches tend to differ in terms of fees, performance, volatility and tax efficiency.

I am largely a proponent of passive funds, as most active funds fail to consistently outperform as promised. 

The Morningstar Active/Passive Barometer measures the performance of active funds against passive peers across trailing periods. In the large-blend global category dominated by US market exposure, passive consistently saw higher returns across all periods measured.

active vs passive
Figure 2: Active vs passive funds in the world large blend category. Source: Morningstar Direct. 2024.   

The study found that consistent outperformance by active managers was rare, and advantages only occurred in certain niche categories such as small caps.

Active manager fees are often higher to adjust for the complexity it takes to beat an index. Morningstar data shows that the average historical fee for an ETF is 0.52% whilst a mutual fund is 0.85%.

With higher average fees and lower chance of outperformance, active ETFs do not align with my ‘set and forget’ strategy.

To align with the investment goal, I’m screening for passive, broadly diversified index-tracking ETFs that better suit my ‘set and forget’ strategy. These EFTs are more straight forward for a novice investor for these reasons:

  • Turnover: Unlike actively managed funds that are seeking to beat an index, passive ETFs generally have low turnover and therefore avoid distributed capital gains (“CGT”). Income and thematic ETFs are constantly adjusting into the highest yielding shares therefore distributing the sale proceeds to shareholders who then incur a CGT event.
  • CGT Discount: The Australian Government offer a 50% CGT discount for Australian resident individuals when they own an asset for 12 months or more. That means the individual only pays tax on half the net capital gain on that asset. The ‘set and forget’ strategy of an index-tracking ETF ensures low turnover and when a CGT event is realised, there is a likelihood of it being discounted due to being held long-term.

Screening criteria

By no means am I trying to create the perfect ETF portfolio for everyone.

Jumping into ETFs without selection criteria can lead down an indefinite rabbit hole of new funds to discover. Defining specific criteria can help you understand your priorities and frame investing from a disciplined approach.

For simplicity I restricted myself to choosing 2 ETFs that met my criteria and splitting allocations 50/50. Some may argue this is far from an optimal asset allocation given the absence of comprehensive analysis but realistically, optimal allocation is only ever known retrospectively and changes dramatically over periods.

Below were my screening requirements when searching for an ETF:

  • A Bronze, Silver or Gold Morningstar Medalist Rating
  • Total cost ratio (<0.05%)
  • North American and Australian Equity

Criteria 1: Bronze, Silver or Gold Morningstar Medalist Rating

Working for an investment research firm certainly has its perks. With an abundance of quality research at my fingertips, it is important that I utilise this resource to my advantage.

The Morningstar Medalist Rating is the summary expression of Morningstar’s forward-looking analysis of investment strategies as offered via specific vehicles using a rating scale with Gold indicating the most positive outlook on relative index outperformance.

Criteria 2: Low management fees

With collective investment vehicles, the fees discussion is critical. Unlike direct equity holdings, owning an ETF involves ongoing holding costs as well as transaction costs.

Morningstar research shows that lower-cost funds have a greater chance of outperforming their more expensive peers. The chart below shows the cheapest quintile achieving a higher success ratio than the most expensive fee quintile. 

low costs are the key to success
Figure 3: Low costs are the key to success. Source: Morningstar Direct. 2024.   

Whilst an incremental difference of a few basis points between fees may appear negligible, it becomes a larger consideration (than transaction costs) when an ETF is intended to be held longer term.

Interestingly, research has shown that average fees for index equity ETFs declined by 15% between 2008 and 2023. Despite fees trending on an overall decline, they do play a part in returns, therefore it is worth at least establishing a threshold of comfort.

The graph below shows a 10-year return on $10,000 in two funds: one with a 0.1% fee and the other with a 0.6%. We assume there are no additional contributions, both funds average investment returns of 8% pa, and the fee stays stagnant. As shown below, the gap in returns becomes more significant over the long term.

impact of fees on return
Figure 4: Impact of fees. Source: MoneySmart. Author inputs.  

Criteria 3: North American and Australian Equities

Firstly, it is important to note that diversification is a risk mitigation strategy, and not always a returns maximisation strategy.

Admittedly, I suffer from a bit of familiarity bias in my investing process. My preference to invest in the US and Australian market stems from my level of comfort. Undoubtedly, there is considerable growth to be found in alternatives such as emerging markets, however investments in such geographies cross my level of comfortability.

A ‘set and forget’ strategy means I do not wish to be an active participant. Therefore, I don’t have to continuously track the political risk, economic volatility, regulatory and liquidity issues inherent in emerging markets.

Despite recent volatility following the Trump tariff tirade, the US market is still the centre of the investing universe. The country has the largest number multinationals corporations in the world, meaning that US investments theoretically give you broader global exposure. Lower taxes as well as research and development incentives further support the case for the US.

Picking the winners 

After my share screen, the winners emerged: BetaShares Australia 200 ETF and Vanguard US Total Market Shares Index ETF.

I have previously written on Vanguard’s US Total Market Shares Index ETF (ASX:VTS) so will only be going into detail on BetaShares Australia 200 ETF (ASX: A200).

A200 is the lowest cost exposure to the 200 largest companies listed on the ASX through the lesser known Solactive Australia 200 Index (weight based on free-float market capitalisation) which has little separation from the ASX 200.

Notably, 85% of its assets are exposed to cyclical and sensitive sectors meaning there is a high correlation between the strategy’s performance and the domestic macroeconomy.

Betashares Australia 200 ETF has a high performance hurdle for active peers. During the trailing five years to Feb 2025, this exchange-traded fund was a steady performer with an annualised return of 9%.

Popular contender, Vanguard Australian Shares ETF (ASX:VAS) which tracks the ASX 300 is also a great broad exposure option, however came at a total cost ratio of 0.07% which excluded it from my set criteria. There is an argument for the further diversification provided by tracking the ASX 300 as opposed to the ASX 200, however in reality the bottom 100 companies hold less than 5% of total index weight.

Conclusions

Dishing out financial advice to family is tough – and generally unremunerated.

Admittedly, this article has been months in the making. Whether it was the weight of the decision or the constant spiral of researching every ETF in our coverage universe.

Whilst the conclusion I landed upon may not solve everyone's asset allocation dilemmas, it does speak to the clarity and confidence gained when you approach investment decisions methodically.

It is important to note that this has been a highly individual process of deduction and may not be the optimal strategy for every beginner investor. It is important to consider the personal goals and circumstances that may frame your investment decisions.

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