Just One Lap users often want to know whether to sell their existing ETFs. It makes sense to pay attention to the weightings of ETFs in your portfolio and how that relates to your strategy. Since new exchange-traded funds (ETFs) list on the market every year, a product more suited to your strategy might be worth considering. In this post we’ll help you think through the decision.
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 on selling 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 broad-market 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.
Why not both?
To avoid the transaction cost and potential tax implications of selling an ETF you already hold, consider stopping your contributions to the ETF you already hold without selling it. Start contributing to the new ETF and give yourself time to sell off your old ETF. Think of it as rand cost averaging your ETF sales while keeping a close eye on your capital gains liability. Even if you don’t sell, over time your new contributions will surpass your current holdings and the first ETF will become a little blip in your portfolio. If you are striving for symmetry in your portfolio, this strategy might not be ideal for you.
At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.