ETFs and the default that wins
Why a 2-3 ETF portfolio beats most active funds, the AU/world split that works, and DCA discipline.
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Why a 2-3 ETF portfolio beats most active funds, the AU/world split that works, and DCA discipline.
A 2023 SPIVA report (Standard & Poor's, the people who run the index) showed that over 15 years, more than 85% of actively managed Australian equity funds underperformed their benchmark. International equity, the same picture. The number isn't a fluke. It's been consistent across decades and markets.
The maths is brutal: active management is a zero-sum game before fees and a negative-sum game after. Half the dollars must, by definition, underperform the index. After 1-1.5% MER, more than half do. Compounded over 30 years, that fee differential eats roughly a third of your terminal wealth.
You're paying for someone in a Sydney office to underperform a robot. The robot wins.
Here's the architecture I'd build today if I were starting from zero, in an Australian taxable account:
The 2-fund version:
The 3-fund version:
That's it. Two or three tickers. Annual rebalance. Total cost under 0.20%. Beats roughly 90% of professional money managers over a decade.
Substitutes that work just as well:
Australians overweight Australian shares. Always have. The argument: franking credits, currency match with your liabilities, familiarity. The counter: the ASX is 25% banks and 20% miners, which means a Big Four banking crisis or a China iron ore reset would torch you.
I run roughly 30% Australian and 70% international, partly because franking inside super (where I hold most of it) is genuinely valuable, partly because I want some currency diversification against AUD weakness, and partly because the ASX is too concentrated for my taste at higher weights.
The "right" answer is somewhere in 25-40% Aussie. Anyone who tells you with conviction it's exactly 30 or exactly 35 is selling something.
If you're holding international ETFs in a taxable account and you intend to spend the proceeds in AUD in retirement (i.e. you're staying in Australia), there's an argument for partial hedging. AUD weakness boosts unhedged returns; AUD strength chews them. Over very long horizons it washes. Over a 5-year window it can swing 30%.
What I do: roughly 50/50 hedged/unhedged on the international slice, because I genuinely don't know what AUD does next, and neither does anyone else. Picking 100% one way is a bet I don't need to make.
DCA is not the optimal strategy in pure expectation. Lump-sum investing wins about two-thirds of the time, because markets go up more than down, so getting your money in earlier is usually better.
But DCA wins in the only metric that matters in real life: behaviour. You won't lump-sum at the bottom. You'll lump-sum at the top, panic when it drops 30%, and sell. I've watched it happen to friends three times. DCA removes the timing decision from your hands and makes the contribution mechanical, which is exactly what you need from a system you'll run for 25 years.
What I do: monthly auto-purchase from the offset account into the brokerage on a fixed day. The amount adjusts annually. The decision is made once. Discipline beats intelligence over decades.
I bought my first ETF without doing either of these. Don't be me.
The hardest thing about ETF investing isn't picking the funds. It's not selling them.
The S&P 500 has dropped 20%+ from peak roughly once every 7-10 years. The ASX 200 the same. In your 30-year journey to retire-by-50, you will live through 3-5 of these. Some will feel like the world is ending (2008, March 2020). Some will feel like a slow grind (2022). Every single one of them will end. Every single one will be a buying opportunity in hindsight.
What you do during those windows determines whether ETF investing works. Sell, and you've broken the contract. Hold and keep buying, and you've given yourself a generational return. The mechanics are the easy part. The psychology is the work.
Boring portfolio. Compounding wealth.
Not financial advice. Talk to an adviser before acting.
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