Just One Lap users often want to know whether to sell their existing ETFs in favour of a new flavour.
Over the last few podcasts I have noticed that Simon likes the equally weighted top 40 and I can understand why. I think I am kind of regretting putting my money in the top 40 rather than the equally weighted top 40. My investment horizon is seriously long term – 20 years if not longer.
Do you think I should maybe dispose of my Ashburton Top 40 and get the equally weighted?”
Because ETFs buy whole markets or sectors, it is possible to stop contributing to ETFs you already own and simply contributing to new ETFs. You would keep an old ETF to avoid costs and tax and to smooth out your exposure risk.
Do you understand the costs?
The biggest risk to your long-term ETF holding performance is fees. Yes, some of the new ETFs have a slightly lower total expense ratio than others, but before you sell one ETF to buy another, consider brokerage fees, account fees and capital gains tax (CGT).
Buying and selling ETFs trigger a brokerage fee just like buying and selling individual shares. If you are thinking about switching between ETFs, the first port of call is the brokerage fee. You will pay this fee twice – once when you sell the old ETF and once when you buy the new one. This is the cost of doing the transaction and can’t be avoided, even within a tax-free environment.
Secondly, the decision to hold or sell an ETF will depend on whether you are paying an account fee. If your broker charges an annual platform or account fee and you intend to switch to a broker that doesn’t, it makes sense to sell the ETF on the paid platform and buy the new ETF on the free platform. If, however, you intend to stay on the same platform, you might as well hold on to the old ETF and just start contributing to the new one.
Lastly, outside of a tax-free investment environment, selling your ETF might trigger capital gains tax. If you intend to sell any other investments for over R40 000 profit within the same tax year, the profit from your ETF sale will be taxed.
Do you understand the exposure?
Before waving goodbye to your old ETF, make sure that your new purchase doesn’t result in concentration risk. Be especially careful when selling a market-wide ETF like a Top 40 product in favour of a smart beta or industry-specific ETF. If a niche ETF is appealing to you, consider holding on to the market-representative product and adding the new product for flavour.
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