Kiwi Investors Latch on to Real Benefits of New Foundation Series Funds
US 500 and Total World Funds, invested through pioneer Vanguard, have brought a popular flavour to the InvestNow house-brand product range.
2 March 2023
Launched late 2022, the two newest additions to the InvestNow Foundation Series Funds are a big hit with Kiwi investors, especially for those focused on long-term returns.
The new Foundation Series US 500 and Total World Funds – both invested through index funds management pioneer, Vanguard – bring a popular flavour to the InvestNow house-brand product range that began in 2020 with a suite of diversified solutions.
InvestNow created the Foundation Series Funds to help Kiwis achieve their investment goals more effectively by using the most cost and tax-efficient vehicles in the market.
Unlike some offshore investments, the Foundation Series products are constructed to institutional-grade tax efficiency standards, meaning more money in the pockets of Kiwi investors and less “donated” to foreign governments.
And in keeping with that tradition, the two new funds now offer the most compelling way for Kiwi investors to gain access to broadly diversified global share markets based on three key attributes:
- underlying investment manager, Vanguard, is one of the most highly respected investment firms in the world
- incredibly low management fees of 0.03 per cent and 0.07 per cent per annum for the Foundation Series US 500 and Total World Fund, respectively
- as Portfolio Investment Entity (PIE) funds both products are only taxed at the individual investor’s prescribed investor rate (PIR), meaning tax is capped at 28 per cent, which is favourable for those investors on resident withholding tax (RWT) rates of 39, 33 or 30 per cent.
Vanguard, a leading global investment house
The two new funds provide investors with direct exposure to two of the most popular exchange-traded funds (ETFs) offered by Vanguard – now the second-largest investment firm in the world with more than $US7 trillion under management.
NZ investors have shown a real passion for investing in growth funds (or those weighted towards shares), particularly via the passive Vanguard vehicles that follow US and global markets, which the Foundation Series Funds invest into:
- The Foundation Series US 500 Fund aims to generate long-run returns by allocating to the Vanguard 500 Index Fund ETF (Ticker: VOO), which in turn invests in shares of the largest listed companies in the United States.
- The Foundation Series Total World Fund targets long-term returns by investing in the Vanguard Total World Stock ETF (Ticker: VT), a broad listed global index fund that houses thousands of large, mid and small capitalisation stocks from developed and emerging share markets.
Incredibly low management fees
Costing just 0.03 per cent and 0.07 per cent in annual management charges, respectively, the Foundation Series US 500 and Total World Funds feature some of the lowest management fees in the entire NZ PIE fund market. For example, other Vanguard funds on InvestNow have management fees set three to six times higher, despite investing into the same underlying ETFs and stocks.
The Foundation Series US 500 and Total World Funds do include one-off transaction fees of 0.50 per cent for each buy order (entry fee) and each sell order (exit fee), which enables InvestNow to keep the annual management costs so low for the benefit of long-term investors.
Investors who stand to gain the most from this fee arrangement are those who adopt a long-term buy and hold strategy.
Real-world tax benefits
PIEs can increase investor returns by up to 0.55 per cent per annum by tax efficiencies alone. Multi-rate PIE funds like the Foundation Series Funds have a maximum tax rate of 28 per cent; by contrast, Kiwi investors who buy Vanguard Australian unit trust funds on InvestNow or in the same Vanguard ETFs via share brokers or other platforms will be taxed at their RWT rate, which can be as high as 39 per cent. This results in Foundation Series Fund investors on 39 per cent tax rates paying nearly a third less tax in any year where they are taxed using the fair dividend rate methodology.
PIE tax is a final payment, so no more administration hassles such as filing an annual tax return – a situation that many investors face when they invest directly in global shares using broker platforms, or offshore domiciled funds like the Vanguard Australian unit trusts available on InvestNow.
Do the maths
We think the combination of low management fees, one-off transaction fees and the PIE tax incentive make the new Vanguard-powered Foundation Series Funds a no-brainer for long-term investors, especially those investors on 39 or 33 per cent marginal tax rates.
Let’s consider the example of one investor, Joe.
Joe is on a 39 per cent RWT, a 28 per cent PIR and wants to invest a lump sum of $100,000 in the Foundation Series US 500 Fund.
Assuming no additional investments or withdrawals over the period and an annual gross return from the underlying ETF of 9 per cent per annum, which includes 2 per cent in annual dividends, we can calculate what Joe’s portfolio can look like in 10 years’ time. The table below compares the different index funds that are available to Kiwi investors on the InvestNow platform and other similar platforms.
Based on the assumptions used in the table, the Foundation Series US 500 Fund provides Joe with clearly superior returns over the long term that are almost 14 per cent* greater in dollar terms compared to the worst performing option that – remember – invests in exactly the same underlying basket of shares.
Of course, the Joe example is for illustrative purposes only: investors should take into consideration other individual factors when making investment decisions; guidance from a professional financial adviser is recommended.
The InvestNow Foundation Series US 500 and Total World Funds represent two of the most competitive options for NZ long-term investors seeking a low-cost, tax-efficient exposure to global markets, especially for those investors on higher marginal tax rates who have more than $50,000 invested in global shares.
The Foundation Series US 500 and Total World Funds offer investors:
- exposure to popular underlying Vanguard ETFs, namely the Vanguard 500 Index Fund ETF (VOO) and the Vanguard Total World Stock ETF (VT)
- super-low management fees
- lower tax rates (capped at 28 per cent), reflecting these are PIE funds
- no tax returns required, reflecting that PIE is a final tax
- one-off transaction fees of 0.50 per cent on each buy and sell order.
*Taking into account that Joe’s original investment of $100,000 does not form part of the “return”.
Implemented Investment Solution Limited (IIS) is the issuer of the InvestNow Foundation Series Funds. For a Product Disclosure Statement please visit www.investnow.co.nz/fund-foundation-series
Neither IIS nor any other party guarantees the return assumptions used in the table above.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.