Last week I wrote about the different commodity ETPs available on the JSE and a number of you noticed different TERs on the same commodity and asked if it was worth switching into the cheaper product if you held the one with a more expensive TER?
The answer is math
Switching between two ETFs carries transaction costs and even at the cheapest rate you’re likely to get of say 0.25% on the buy and sell side, that means you’re spending 0.50% on transaction costs. Add the other statuary fees and the spread (difference between buy and sell price on the JSE). Suddenly that switch is costing you more than 1% and potentially a lot higher if you have a higher brokerage rate.
So if the switch is only saving you 0.05% on the TER and it’s costing you 1% to do the switch. The math says it’ll take twenty years for your TER savings to have paid off the cost of that switch,
If the TER difference is large, say 0.5%, well then it’s just a couple of years before your savings are ahead of the cost of the switch.
So run the numbers and check if it works.
Tax
You will potentially have a tax hit on the sale and that could be a lot which would make any switch a horror bad idea. You sell to save a little and get hit with a giant tax bill.
Of course if you’re holding in a tax-free account then this is moot.
For me personally, I seldom switch just for a slightly lower fee. However I will put new money into the cheaper ETF going forward.
ETF blog
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.
