Plain Talk Library
Contents Investing for income 4 Weighing up your income needs 5 Types of income assets 8 Cash investments 10 Fixed income 13 Prices, yields and interest rates 17 Property 20 Shares 25 How dividends work 27 Diversified income strategies 31 The indexing pioneers 34
Investing for income Most people have different investment income requirements. Investors with longer-term investment objectives often need to balance their current and future income needs. For investors with short-term objectives like retirees, the priority might be to produce a regular, stable income-stream while preserving their capital. Regardless of your particular needs, income assets play an important role in investment portfolios. They can improve diversification and provide stability during periods of share market volatility. The good news is that income and capital growth don t need to be mutually exclusive. Some shares and listed property trusts provide a tax-effective income in the form of franked dividends and tax deferred distributions respectively. They can also provide growth over time so your savings have a better chance of keeping ahead of inflation. This Plain Talk guide explains how you can generate income through investing. It explains the different types of income investments, factors impacting returns and the importance of tax. 4 Connect with Vanguard > vanguard.com.au > 1300 655 101
Weighing up your income needs The right mix of income-producing investments for you depends on a number of factors, including: The amount and frequency of income you need If your primary need is for regular income and you need quick access to your money, you may find shorter-term income assets such as fixed income and cash will better suit your needs rather than growth assets. If your income needs to last a long time, including assets that have the ability to grow their income streams over time, such as shares and listed property, can be beneficial. Your investment timeframe Usually the longer your investment timeframe, the more growth assets you can afford to include in your portfolio. If your timeframe is less than five years, investing in shares may not be the best option as shares can be volatile over shorter time periods. You also need to be aware of the impact inflation can have on the buying power of your capital and income payments. Including growth assets in your portfolio can help reduce this impact. Often including a mix of assets some designed for short-term requirements and others designed to grow your capital can be the best option. Vanguard Plain Talk Guides 5
Your risk tolerance Understanding your attitude to risk and return is arguably your most important consideration when planning your investment strategy. You might be attracted to the prospect of great performance, but how much risk are you willing to take to achieve it? If like many income-focused investors your investment profile is conservative make sure you choose your investments to match. Risk is typically defined as volatility, which is measured by the frequency with which you can expect to receive an annual negative return. Your tax position Make sure you understand the tax implications of your investments before you invest. Different types of assets are treated differently for tax, with some like shares and listed property offering attractive tax concessions. 6 Connect with Vanguard > vanguard.com.au > 1300 655 101
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Types of income assets Many asset classes offer a steady income cash, property (listed and unlisted), fixed income (such as government and corporate bonds) and high-yielding shares are all examples. Some asset classes also offer a combination of income and capital growth. Fixed income (or bonds) and cash are classified as income assets for their steady and reliable income producing capabilities. While their returns tend to be more stable than growth type assets, they don t offer the same capital growth potential. Growth assets such as shares and property primarily provide returns in the form of capital growth. These assets can also provide a tax-effective income stream, but it s important to look for assets with a strong dividend paying track record. Some property and share investments can provide the potential for a growing income stream. For example, property owners may increase rents or company profits may increase over time. There is a myriad of alternative assets that can also provide income such as infrastructure, hedge funds and capital protected products. These assets can offer different levels of income, risk and return, credit quality and liquidity, so it s important you understand the underlying investments before you invest. Income and growth Table 2 compares the annualised performance, including the income and growth components of the return, for each asset class over 20 years. 8 Connect with Vanguard > vanguard.com.au > 1300 655 101
Table 1. Features of traditional income producing asset classes Cash/ term deposits Bonds/ fixed income Property Shares Current income Yes Yes Yes Yes Potential for growing income (dividends) Potential for capital growth (and losses) No No Yes Yes No Yes* Yes Yes Risk/return level Low Medium High High Minimum timeframe 1 yr 3 yrs 5 yrs 7 yrs *if traded on secondary market (see page13 for further details) Table 2. Annualised returns over 20 years: Growth and income split Asset class Income return Growth return Total return Australian shares 4.28 5.50 9.78 Australian listed property 7.04-0.05 6.59 Australian bonds 7.63 n/a 7.63 Cash 5.63 n/a 5.63 Source: Vanguard calculations based on following indices: Australian shares: S&P/ASX All Ordinaries Index, Australian real estate investment trusts: S&P/ASX A-REITs Index, Australian bonds: UBS Composite Bond Index, Cash: UBS Australian Bank Bill Index. 20-year period from September 1992 to September 2012. Past performance is not a reliable indicator of future performance. The above table does not relate to Vanguard funds. Vanguard Plain Talk Guides 9
Cash investments Cash investments can include bank deposits, term deposits, bank bills, treasury notes, cash management trusts and managed funds. Cash investments usually mature within 12 months or less. Characteristics Unlike shares, income makes up the entire return on cash investments. The level of income varies as interest rates move up and down, primarily in line with official interest rates. Official interest rates typically rise and fall with inflationary expectations. The Reserve Bank of Australia (RBA) may increase official interest rates if inflation is too high and the economy is overheating, and reduce rates if inflation is low and economic activity is slow. The interest rate you receive also depends on the types and maturities of securities held. Usually, the longer the term of the security the higher interest rate. Cash management trusts and managed funds usually invest in a range of short-term money market investments and provide the potential to earn higher returns than bank accounts and term deposits. Benefits Unlikely that you will lose your capital Bank deposits are covered by the Government guarantee Lowest volatility of all asset classes Reliable and stable income returns Ready access to funds 10 Connect with Vanguard > vanguard.com.au > 1300 655 101
Risks Some cash investments are not covered by the Government guarantee Can t grow your capital your money may not keep pace with inflation and lose its purchasing power over time Lower expected returns than other asset classes, such as bonds and shares Income and performance This chart shows the annual cash returns as measured by the UBS Australian Bank Bill Index over the last 20 years. It also shows the annual inflation rate. The RBA aims to keep inflation within a 2% to 3% target band. This is why interest rates have been more stable since 1993. Annual cash returns and inflation rate Annual Returns (%) Dec 1993 Dec 2012 10% 8 6 4 2 0 Source: UBS. 93 94 95 96 97 98 99 01 02 03 04 05 06 07 08 09 2010 11 12 2000 UBS Bank Bill Index (%) CPI %Y/Y Vanguard Plain Talk Guides 11
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Fixed income Bonds can be issued by federal and state governments, semigovernment authorities, banks and other corporations, both locally and overseas, to raise capital for projects. They have longer investment terms than cash investments, with maturities ranging from one to more than 30 years, and typically pay higher interest rates. Fixed income is a popular asset class with investors as it provides a regular and reliable income stream and capital stability. It can also provide additional benefits when held with equity-type investments. As fixed income performs better at different times, it can reduce the impact of share market volatility. This is why fixed income is called a defensive asset class. Types of fixed income securities Government bonds Issued directly by a government and are explicitly guaranteed. Semi-government bonds Not issued directly by a government but might have a direct or implied guarantee. Corporate bonds Issued by large public companies to fund expansion and other major projects. Higher risk than government bonds, but typically offer higher yields. Credit quality can vary. Hybrids Have characteristics of both equity and fixed interest securities. Some bonds can be converted into equity at a future date. Higher risk than government or corporate bonds. Vanguard Plain Talk Guides 13
Structured Pool together a range of debts like residential mortgages or credit cards into parcels. These are then segmented into a range of risk profiles and sold to investors. Risk levels vary depending on the quality of underlying investments. Characteristics Fixed income securities, or bonds as they are often called, are types of loans. They operate like an IOU, whereby you lend your money to the issuer for a set period of time, in return for interest paid over the term of your investment. Your investment, or capital, is then paid back to you in full at the end of the investment term. Interest rates can be fixed or floating. Fixed rates are set for the life of a security, while floating rates are reset periodically and can change with interest rate movements. A bond s issue price is called its par value and its regular interest is called a coupon payment. If you hold a bond until maturity your total yield equals the coupon interest rate. Professional investors such as banks and fund managers often trade fixed income securities on the secondary market before their maturity. Bond yields and returns can vary when bought and sold this way. See section Prices, yields and interest rates on page 17. Not all fixed income securities are the same Risk is an important consideration when investing in fixed income. Securities are issued with a credit rating by independent agencies like Standard & Poor s (S&P), Moody s and Fitch. The credit rating gives an indication of the likelihood 14 Connect with Vanguard > vanguard.com.au > 1300 655 101
of the issuer paying regular and timely income payments and repaying your capital at the end of the term. Bonds can be broadly classified as investment grade or subinvestment grade, also commonly known as junk bonds. Investment grade bonds carry a Standard & Poor s rating of BBBor better (Moody s equivalent is Baa3). Sub-investment grade bonds carry a rating below BBB- and can include bonds that have defaulted on their loan conditions. Usually, the lower the rating, the higher the risk and yield on offer. Holding a range of bonds with different maturities and issuers can help reduce risk. Investing in both international and Australian fixed income securities can provide further diversification while providing opportunities for enhanced returns. The international bond market includes over 12,000 securities compared to around 400 in the Australian market. While the retail Australian bond market is growing, fixed income can be difficult to access directly as an individual investor. Fixed income securities often have high minimum investment requirements. Managed funds provide a way of accessing a diversified portfolio of securities with much smaller minimum investment, which can include a mix of Australian or international government and corporate fixed income investments, or a combination of both. Index funds and exchange traded funds (ETFs) can provide a low cost way to access a broad portfolio of Australian and international fixed income securities. Vanguard Plain Talk Guides 15
Benefits Steady and reliable income stream Potential for some capital growth Lower volatility than equity investments Diversification benefits when held with other assets Liquidity can be sold on secondary market. Risks Interest rates can fluctuate and impact the capital value of your investment Credit risk refers to the risk of an issuer defaulting on repayment of capital Less capital growth potential than shares and property Rising inflation can erode the value of your income payments and capital. Income and performance After the Global Financial Crisis and European debt crisis bond yields were at historically low levels. Governments around the world reduced interest rates in an effort to reignite their economies. During this time, fixed income was one of the best performing asset classes as bond prices rose. Typically, bond yields increase when global economic growth picks up and interest rates start to rise. This can have a negative impact on bond prices given their inverse relationship to bond yields. 16 Connect with Vanguard > vanguard.com.au > 1300 655 101
Prices, yields and interest rates There is an inverse relationship between interest rates and bond prices. When interest rates go up bond prices typically go down and vice versa. Fixed income securities can provide capital growth and losses when sold prior to the maturity date. Investors can experience a capital loss when interest rates are rising and they sell their bonds for a lower price. Likewise, if interest rates are falling, investors have the potential to make a profit by selling their bonds for a higher price than they paid. If, for example, you buy a bond with an interest rate of 5 per cent and interest rates rise to 6 per cent, your bond will be worth less than new bonds and investors will want to pay a lower price for it. If you were to sell it on the secondary market you would receive a lower price and incur a capital loss. If you hold your bond until maturity interest rate risk is less of a consideration. You will receive set income payments at the agreed interest rate for the life of the bond and your capital is repaid when the bond matures. Typically, negative returns only occur for a short period of time in diversified fixed income portfolios. The portfolio will continue to receive income while coupons and the maturing principal are reinvested at higher yields. The yield provides an indication of the total return from a fixed income security. It is calculated by dividing the security s annual income by current market value. Fixed income returns are primarily driven by expectations for economic growth, inflation and interest rates. Vanguard Plain Talk Guides 17
Tax Tax can make a big difference to the amount of income you get to keep. Because of its nature, all income from fixed income and cash investments is treated as taxable income and taxed at the investors relevant tax rate. This may not be an issue if you are on one of the lower marginal tax rates, but for those on higher rates it means almost half your income could be eaten by tax. 18 Connect with Vanguard > vanguard.com.au > 1300 655 101
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Property Property investment is available via direct property, listed real estate investment trusts (REITs) and managed funds. The Australian market includes properties across different geographic regions and sectors, such as the retail, diversified, office, industrial and hotel and leisure sectors. Investing in international property can provide access to these and other sectors, such as residential, while providing exposure to developed and emerging economies. Characteristics Direct property offers steady rental income, tax breaks via negative gearing and capital appreciation. It also has a number of drawbacks. It takes time to buy and sell: building a diversified property portfolio is an expensive exercise; your property exposure is limited to one sector; locating and keeping good tenants can be difficult and there is always ongoing care and maintenance. There is also the risk of capital loss and lower rentals during times of oversupply and economic downturn. REITs, also called property trusts, are pooled investments with units listed on the stock exchange, which hold a basket of properties in one or more of the property sectors. As REITs are professionally managed, they provide many of the benefits of direct property investment with less effort. Returns can include income in the form of rent received from the underlying properties and capital growth (or loss) from changes in the value of the share price. 20 Connect with Vanguard > vanguard.com.au > 1300 655 101
Some REITs have more stable income streams than others particularly those with quality tenants and secure lease terms that are in good locations. REITs also offer tax advantages to investors in the form of tax deferred income distributions. Managed funds can invest in single or multiple listed property sectors. Some include some exposure to direct property and international property securities. The main benefits of managed funds are that you can invest in properties you would not be able to access directly yourself and you can hold a diversified portfolio of properties for a relatively small initial outlay. Index funds and ETFs can provide a low cost way to access a broad portfolio of REITs on both Australian and international markets. Benefits Steady income stream Capital growth potential Tax advantages in the form of tax deferred income Diversification benefits if held with other assets REITs are liquid and can be readily bought and sold on securities exchange Risks Property is a long-term investment, which typically has higher risk than income investments Direct property can be illiquid and difficult to sell REITs can experience share price volatility Investment quality and investment Vanguard Plain Talk Guides 21
Income and performance Historically, REITs have offered attractive yields compared to income assets and stable capital values. However, volatility in the sector increased during the 2000s. During this period the REIT sector underwent considerable structural change as the focus shifted towards development, funds management and leverage opportunities. Trusts involved in these activities had high gearing levels and were extremely sensitive to interest rate rises. More recently, the sector has reduced its high gearing levels and realigned itself to its traditional core activities of managing properties, securing long-term tenants and providing investors with a stable income. Income seeking investors often compare the income yields (income as a percentage of capital value) of listed property trusts to 10 year bonds when assessing investments. This is shown in the chart below. Yield comparison: Listed property trusts and 10-year bonds 14% 12 10 8 6 4 2 0 2001 2003 2005 2007 2009 2011 2013 Listed property trusts 10yr bonds Source: Vanguard, using market data. Past performance is not a reliable indicator of future performance. The above chart does not relate to Vanguard funds. Dividend yield for the S&P/ASX 200 Listed Property Trusts. The 10-year bond yield is represented by the yield on Australian government issued debt. June 2001 to April 2013 22 Connect with Vanguard > vanguard.com.au > 1300 655 101
Tax Australian listed property trusts offer tax advantages to investors in the form of tax deferred income distributions. Tax deferred income distributions arise when taxable income is less than accounting income. In particular this situation arises in relation to building allowances and depreciation claims that are greater for tax purposes than for accounting purposes. Simply put, the tax deferred component is not included in the investor s assessable income in the year of receipt. Rather it is deferred until the sum of the tax deferred amount exceeds the purchase price or the investor sells the investment. When the investment is sold, the tax deferred distributions are reflected in the calculation of capital gains. Where the investment is held for more than 12 months, any gain may be eligible for a capital gains tax concession of up to 50 per cent. Vanguard Plain Talk Guides 23
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Shares Investing in the share market provides a way to participate in the growth and future profits of large and small Australian and international businesses. You can invest in the share market directly via the Australian Securities Exchange (ASX) or indirectly through managed funds and ETFs. High yield or imputation-style managed funds are biased towards companies expected to pay greater cash dividends and franking credits. As a result, they tend to provide a higher income return than broader Australian shares funds. Characteristics While shares are primarily a growth asset, they can also provide tax-effective income. Shares can be particularly attractive to income-seeking investors as they can provide steady income while growing their capital over time. Most companies distribute a proportion of their profits in the form of dividends. Some companies pay higher dividends than others. As companies grow and become more profitable they typically increase their dividends. Historically, blue chip companies in the banking, insurance and telecommunications sectors have paid higher dividends than those in growth-oriented sectors such as mining and technology. These companies tend to reinvest profits for future research, expansion or exploration. Vanguard Plain Talk Guides 25
While actual yields can change from year to year and vary from company to company, they are usually less volatile than share prices. If company profits are not growing, dividends are likely to be stable and if profits fall, a company may reduce its dividends. Investing in a diversified imputation or high yield style fund can lessen this impact, as different companies will perform better at different times. Dividend imputation is the main reason Australian shares are so tax effective. Given companies have already paid tax at the company tax rate, investors can use franking credits to offset the amount of tax they pay on dividends. The higher the franking level the greater the benefit. This is explained further overleaf. International shares don t provide the same tax-effective income benefits as their Australian counterparts as income is usually generated in the form of realised capital gains rather than dividends. Benefits Tax-effective income through dividend imputation Potential for strong capital growth Potential for higher yields than income assets Diversification benefits if held with other assets Can be readily bought and sold on securities exchange Risks Long-term investment with higher risk than income assets Share prices can be volatile over the short term Potential for capital loss 26 Connect with Vanguard > vanguard.com.au > 1300 655 101
How dividends work Companies distribute profits in the form of dividends. Dividends are declared as an amount per share, for example 15 cents per share. The company s directors decide on the size and frequency of the dividend. Dividends are usually paid twice a year the interim dividend paid after the half-year profit and the final dividend paid after the full-year profit. They are often distributed with franking credits, which can be used to offset personal income tax. The total dividend for the year (the sum of the interim and final dividend payments) is used to calculate the dividend yield the theoretical return on shares if the investor buys at the market price. It is calculated by dividing the dividend per share by the market price and then showing the result as a percentage. The proportion of earnings paid out in dividends is called the payout ratio. If a company earns $1 a share and pays a 40 cent dividend, the payout ratio is 40 per cent. This ratio is an important investment tool. It is one way to measure and compare a company s dividend policy with other companies in the same industry and the market as a whole. Vanguard Plain Talk Guides 27
Australian shares dividend yield for 20 years 7.0% 6.0 5.0 20 year average: 4.2% 4.0 3.0 2.0 1.0 0 S&P/ASX All Ordinaries Dividend Yield 94 95 96 97 98 99 01 02 03 04 05 06 07 08 09 11 12 13 2000 2010 Source: UBS (August 1993 - February 2000) Factset (March 2000 - August 2013). Dividend yield for the S&P/ASX All Ordinaries Total Return Index. Income and performance The chart above shows the historical dividend yield for Australian shares and the average dividend yield over a 20-year period. The long-term average dividend yield gives an indication of the expected long-term yields from the share market. Tax Shares can provide tax benefits in the form of franking credits. Shareholders receive a cash dividend along with franking credits (equal to the amount of tax paid by the company on its profit). The franking credits are then used to offset income tax payable on an individual s annual tax return. It is important to note that on the tax return the full dividend (called the grossed-up dividend when it equals the cash dividend plus the franking credits) must be declared as income with the franking credits used as a tax offset. 28 Connect with Vanguard > vanguard.com.au > 1300 655 101
Because the company tax rate in Australia is 30 per cent, the maximum imputation credit attached to a dividend will be 30 per cent of the grossed-up dividend. If a dividend has an attached franking credit at the 30 per cent company tax rate it is referred to as fully franked. Sometimes, depending on how much tax a particular company has paid on its profits, the franking rate will fall below the 30 per cent mark and investors will only receive a partially franked dividend. Companies like major banks pay fully franked dividends, which is one of the reasons they are so popular with investors. Investors with a marginal tax rate of 30 per cent who receive a fully franked dividend can effectively receive their distribution totally free of tax. The situation is even better if your marginal tax rate is below 30 per cent or you invest through a self-managed super fund where the tax rate is 15 per cent in accumulation phase and zero if in the pension phase. Any imputation credits in excess of your income tax liability may be refunded in cash by the Australian Taxation Office (ATO). Franking credits work in a similar way in a share fund. The credits received from the underlying assets are taken into account and a franking level for the fund is calculated. The credits are passed on to unitholders, together with any other income distributions. Your fund manager provides you with a tax statement after the end of the financial year, which details franking credits and other distributions you received and this should be used to complete your tax return. Any excess franking credits over your total tax payable are refundable in cash from the ATO. Vanguard Plain Talk Guides 29
Comparison of Cash Rate, 10-Year Bond Yield, Australian Shares Dividend Yield and Inflation Rate 8% 6 4 2 0 Dec 02 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 2010 RBA target band (2-3%) Cash Rate 10Y Bond Yield Aust. Shares Dividend Yield Inflation Rate Jan 11 Jan 12 Jan 13 Source: FactSet, UBS. Note: The inflation rate is represented by Australian CPI year over year % change, total excluding volatile items. The cash rate is represented by the UBS Australia Bank Bill Index. The Australian shares dividend yield is represented by the dividend yield on the S&P/ASX All Ordinaries Total Return Index. The 10 year bond yield is represented by the yield on Australian government issued debt. March 1993 - June 2013. 30 Connect with Vanguard > vanguard.com.au > 1300 655 101
Diversified income strategies For many investors a mix of income and equity type assets is the best option. Different asset classes will provide different yields and total returns at different times. With a diversified portfolio of investments, returns from better performing investments can help offset those that underperform. A balanced portfolio of income-producing shares, property, cash and bonds can provide a good combination of income for today, growing income for the future and capital growth over time. Finding the right balance is a matter of weighing up the risk characteristics of various mixes of assets against your time horizon, goals and the returns you desire from your portfolio. Income and performance The chart to the left compares the cash rate, 10-year government bond yield and dividend yields on Australian shares and REITs against the inflation rate over the last 10 years. Direct investment and managed funds Many fund managers offer diversified income managed funds with various asset class exposures. For example, some will focus on providing monthly income and predominantly invest in fixed interest and cash type assets. While others will include more growth assets like shares and listed property. Whether you decide to invest directly or via managed funds depends on a number of factors including your time, discipline and Vanguard Plain Talk Guides 31
confidence. One of the major advantages of managed funds is that you can access a much wider range of investments than you can by investing directly yourself. Because managed fund investors enjoy a greater level of diversification than direct investors, they are less exposed to the performance fluctuations of individual shares or securities. You also get the benefit of your money being professionally managed for you. 32 Connect with Vanguard > vanguard.com.au > 1300 655 101
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The indexing pioneers Vanguard pioneered the concept of indexing, introducing the first retail index fund in the US in 1976. Since then, The Vanguard Group, Inc. has grown into one of the world s largest and most respected investment management companies. Vanguard now has global presence with offices in the US, Canada, UK, Europe, Australia, Japan and Singapore. In Australia, Vanguard has been helping investors meet their long-term financial goals with lowcost indexing solutions since 1996. Vanguard s range of index managed funds and ETFs Vanguard offers a range of index managed funds and ETFs across all asset classes that can be used as a diversified standalone portfolio solution, or in conjunction with active funds as part of a core-satellite approach. For more information on our product offerings please visit www.vanguard.com.au. 34 Connect with Vanguard > vanguard.com.au > 1300 655 101
Vanguard s range of Plain Talk guides At Vanguard, we believe it is just as important to know about the potential risks of your investments as well as the rewards. That s why we publish our Plain Talk guides on a range of popular investment topics. After all, better informed investors make better investment decisions. Our Plain Talk range includes: Understanding indexing Realistic share market expectations Building your investment portfolio Investing for income Self managed superannuation funds Managed funds Exchange traded funds Bond investing Timeless investments lessons Vanguard Plain Talk Guides 35
For more information Contact us or speak to your financial adviser. Individual investors Web vanguard.com.au Phone 1300 655 101 8:00 am to 6:00 pm Monday to Friday (Melbourne time) Email clientservices@vanguard.com.au Mail Vanguard Investments Australia Ltd GPO Box 3006 Melbourne Vic 3001 Financial advisers Web vanguard.com.au/advisers Phone 1300 655 205 8:00 am to 6:00 pm Monday to Friday (Melbourne time) Email adviserservices@vanguard.com.au Mail Vanguard Investments Australia Ltd GPO Box 3006 Melbourne Vic 3001 36 Connect with Vanguard > vanguard.com.au > 1300 655 101
Connect with Vanguard The indexing specialist vanguard.com.au 1300 655 101 Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken your circumstances into account when preparing this document so it may not be applicable to your circumstances. You should consider your circumstances and our Product Disclosure Statement ( PDS ) before making any investment decision. You can access our PDS at vanguard.com.au or by calling 1300 655 101. Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) ( Vanguard ) is the issuer of the Vanguard Australian ETFs. Vanguard is the issuer of the Prospectus on behalf of the US listed exchange traded funds ( ETFs ) described in the Prospectus. Vanguard has arranged for interests in the US ETFs to be made available to Australian investors via CHESS Depositary Interests that are quoted on the AQUA market of the Australian Securities Exchange ( ASX ). Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard ( Eligible Investors ). Retail investors can transact in Vanguard ETFs through a stockbroker or financial adviser on the secondary market. Investors should consider the Prospectus and Product Disclosure Statement in deciding whether to acquire Vanguard ETFs. Retail investors can only use the Prospectus and Product Disclosure Statement for informational purposes. You can access the Product Disclosure Statement and Prospectuses at vanguard.com.au. Past performance is not an indication of future performance. This document was prepared in good faith and we accept no liability for any errors or omissions. 2013 Vanguard Investments Australia Ltd. All rights reserved. PTGIFI 052013