ETF: Low fees double your investment*

In ETF Blog, Latest by Simon Brown

I’ve told the story of my first unit trust many times, so if you’ve heard it before skip to the second paragraph.

The first, and only, unit trust I owned was a small cap one which I bought around the mid-1990s. It had a fee of some 5% a year. This included the advisor fee, platform fee and of course the total expense ratio (TER), although we didn’t know what a TER was back then. It also had a performance fee, but I never paid that as when I sold it years it still hadn’t ever performed.

We now have local exchange-traded funds (ETFs) at a fee of 0.1%  Just yesterday I received a press release about an active unit trust that is launching with a fee of 0.52%: all-inclusive and no performance fees. Heck, this is mid-range of local ETF fees.

In the US, where the size of ETFs is markedly larger, they have ETF fees at 0.03%. Early last year, as a marketing stunt, one new ETF had a negative TER. Yip, they paid you to hold it, but the ETF was closed earlier this year after the house was sold.

The fee war has truly been won by low fees and it is hugely important.

Consider the South African collective investment landscape, comprising of unit trusts, ETFs and hedge funds. According to the Association for Savings & Investments SA (ASISA), this industry had R2.54trillion assets under management at the end of last year!

A 1% fee on all that cash would be R25.4bn, which is an obscene amount of money for the industry, especially since very few funds actually deliver on the promise to beat the market. In other words, they get the money for being bad at their job. At the old 5% a year that’s R127bn a year in fees!

Now imagine we have an average TER of 0.5%. The fun damagers now get R12.7bn (still plenty to fund a third home in Plett) and us investors get extra cash in our pockets.

Cutting the fee from 1% to 0.5% at 60 million South Africans results in just over R200 per South African per year saved on fees. That doesn’t change many lives, but at R200 a year for an investment lifetime in my pocket, rather than somebody else’s.

But let’s drill this even further.

If we use the original 5% annual fee vs. a 0.5% that equates to just over R1,900 saving for every South African. That’s the progress over the last twenty years of fee wars. In total, over 20 years, that’s R38,000 of saved fees every year. Here’s where it gets totally wild. Using that R2.54trillion number and 60 million South Africans, the average person has some R42,000 invested. So the fee saving over the last two decades (excluding any growth) is almost equal to a person’s total investment.

Fees matter.

* Now sure, not everybody has an investment and how would those poor fun damagers survive on a measly R12.7bn a year? And yes, some large pension funds are already at or below 0.5%. And, finally, yes the industry was not R2.54trillion twenty years ago. But the point remains, fees hurt and low fees are the best fees.

The fee war has been won and it is an enormously important victory for everybody.

Simon


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