Wednesday, 26 April 2017

Opinion

Are ETFs really four times costlier than unit trusts?

Patrick Cairns




CAPE TOWN – The recent comments by Sygnia's CEO Magda Wierzycka (pictured) about the comparative costs of index tracking unit trusts and exchange-traded funds (ETFs) stirred a fair amount of interest on Moneyweb. Wierzycka made the observation that ETFs are “three to four times more expensive” than unit trusts that track the same index.

“There are tiers and tiers of costs,” Wierzycka said. “You start with the brokerage that you have to pay, never mind the platform fee and someone has to actually make that ETF available to you. Then you're looking at the bid offer spread, which is the difference between the buy price and the sell price, and those bid offer spreads are running at anything up to 1%.”

So have investors been duped? Have they been sold ETFs on the understanding that they are low cost products, when this is actually not the case?

To start answering that question, it's important to make a distinction between the costs of the products themselves and what it costs to access them. When comparing the total expense ratios (TERs) of ETFs and unit trusts, there is very little difference.

The below table compares funds that track the same index. The ETFs are highlighted next to comparable unit trust products.

Index tracking fund TERs
Fund TER
Satrix Divi ETF 0.45%
Satrix Dividend+ Index Fund 0.58%
Sygnia Divi Index Fund 0.47%
Satrix 40 ETF 0.45%
RMB Top 40 ETF 0.16%
Satrix Top 40 Index Fund 0.98%
Sygnia Top 40 Index Fund 0.46%
Kagiso Top 40 Tracker Fund 0.68%
Source: Fund fact sheets

Just looking at the funds themselves, then, there is no real cost distinction. If anything ETFs are slightly cheaper by the above examples.

However, this is not really what Wierzycka was referring to. Her concern is that in order to invest in an ETF one has to pay a lot more than the TER.

The first additional cost is brokerage. Since ETFs are traded on the JSE, a broker of some sort has to be involved in making a purchase or a sale.

Brokerage however differs widely. Some stockbrokers will charge a flat fee, others will charge a percentage of the trade. If investors are using the Satrix or etfSA platforms, brokerage is fixed at just 0.1% plus VAT.

Platforms and stockbrokers also generally charge ongoing fees to keep your account open. On the Satrix platform this is between 0.35% and 0.6%, and with etfSA it ranges from 0.4% to 0.7%, depending on how much you have invested. Stockbrokers tend to charge a fixed monthly fee, which may in some cases be waived if more than a certain number of trades are made.

However, it's not only ETFs that are accessed through investment platforms. Many investors also buy unit trusts through Linked Investment Service Providers (LISPs) that also charge ongoing fees and, in some cases, initial fees.

The final piece of the puzzle is the bid-offer spread. Simplistically, this is the difference between what you have to pay for an ETF and what you can sell it for.

Wierzycka mentions that is spread could be 1%, but its important to note that this is the upper end of the scale and mostly applicable to international ETFs listed on the JSE. According to Nerina Visser, strategist and adviser at etfSA, the spread can also be as low as 0.07%. Her research has shown that the average for domestic ETFs is no more than 0.25%.

What's also important to note is that unit trusts have a buy-sell spread too. So when you buy or sell a unit trust, you are also subject to this variance in pricing.

Those costs are undeniably part of accessing ETFs. However, do they necessarily make it a more expensive proposition?

The answer is that it really depends on the investor. If, for instance, you already have a stockbroking account, you are paying the monthly fees anyway and so that isn't really an extra cost.

If you wish to transfer between ETF investments fairly regularly, paying the platform fee to etfSA or Satrix may also ultimately be a cost saving, since you only pay the brokerage fee of 0.1% plus VAT either way to transfer funds between products. A similar switch from one unit trust to another, especially if it is from one provider to another, comes at a much higher cost.

The size of your investment and how often you transact also matters. If you are making a lump sum investment of R500 000, a fixed brokerage fee is probably negligible. It may however be more of a drag if you have a small monthly debit order.

A broad comparison can't really be made unless all of these factors are taken into account because investors access these products in different ways, and that is really where the distinction in cost comes in.

“It's good to expose all these costs and show that we are transparent as an industry,” says the CEO of Satrix, Helena Conradie. “But you can also confuse the investor by making it seem like it's only the index tracking investment industry that charges all of these extras.”

Depending on how you access unit trusts, there are potentially layers of fees involved as well. So it's not simply a case of one being better than the other. It's important to understand that there are choices involved in how you access the different products those are what ultimately impact on what you pay.

“As an investor you need to know what your requirements are,” says etfSA's Visser. “Are you investing via a regular monthly debit order, or are you making large once off investments? Do you want to reinvest dividends? Are you following a buy-and-hold strategy, or do you switch investment exposures frequently? Based on your typical investment pattern can do a cost comparison across products and access channels and work out what suits you best.”

What is probably true, however, is that investing in index tracking unit trusts can be cheaper than investing in the same indices through ETFs. If you buy the products directly and intend to hold them over the long term, then unit trusts may be more appealing. That, however, is a particular investment choice, which does not mean that it's relevant to everybody.

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