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How to compare ETF and unit trust fees

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How to compare ETF and unit trust fees

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Fees can really weigh on your investment performance. For every extra 2% per year in fees, you could end up with one-third less of an investment value after 40 years. Tracking down all your product fees is hard work, but fortunately there’s an easy way to compare ETF and unit trust fees. It’s called the EAC. If your EAC is 1%, you’re doing pretty well. But some unsuspecting investors are paying as much as 4% per year! To understand the EAC it’s necessary to understand the different levels at which fees get charged in the industry.

The three levels of investment fees

There are nearly a hundred different types of fees in the industry, but they can all be classified under one of the following three levels: 1) fund or investment management; 2) platform or product or admin; and 3) adviser level.

Fee levelETFUnit trust
Fund/ investment managementcompulsorycompulsory
Platform/ admin/ accesscompulsoryoptional
Adviseroptionaloptional

Source: gofreedom.co.za

Since we’re comparing ETF and unit trust fees, this much we know is true: at the first level, the fund level, an ETF is almost always cheaper than a unit trust tracking the same index.

But at the next level, the trading platform or access fees – like brokerage and the bid-offer spread – still need to be added to the fund fee of the ETF for a fair comparison. It’s impossible to buy an ETF without this next level of fees, while you can avoid them with a unit trust. It’s a common error to only compare the two products at fund level and think you’re done.

With a unit trust you have a choice: you can either buy the unit trust directly from the unit trust management company (manco) with no additional platform or admin fee; or you could buy it from a linked investment platform, which will then bring in an additional layer of fees, what the platform often calls an admin fee.

You may ask, why would you go the platform route and pay more if you can buy your unit trust directly? There are four main reasons many people prefer the one-stop platform:

  • Useful parts of your admin get done for you.
  • It’s easier to switch between funds.
  • Platforms offer more product options – like preservation funds.
  • Making any change to your portfolio – like beneficiary nominations or a change of address – is much quicker.

I use a platform to buy all my Allan Gray, Fidelity, Foord, Nedgroup, and Satrix unit trusts. As an alternative, you could also open an account with each of these product providers individually and pay no platform fees. BUT you would then need to, for example, collect tax certificates from all of them for your e-filing. Fortunately, the platform aggregates all the funds and sends me one combined tax certificate. It’s particularly useful with offshore unit trusts, where the tax administration can get tricky. The platform also provides one combined asset allocation view across all products and funds – no need to populate a spreadsheet manually for all your unit trusts’ underlying holdings. If I wanted to switch out of, say, Allan Gray into Satrix and didn’t use a platform, I would have needed to withdraw the money from my Allan Gray unit trust, and wait for it to appear in my bank account before making an EFT into my Satrix account. But because both the Allan Gray and Satrix funds are on my chosen platform, there’s no need for all the palava – within seconds the switch instruction is with the platform and they will do the work.

The bottom line: if you’re not allergic to admin and are willing to make more of an effort, you can score about 0.5% per year in fees if you buy your unit trusts directly from the unit trust management companies.

How much can you expect to pay per fee level?

Fees vary hugely and especially the fund fee for actively managed unit trusts can be much more than mentioned here, but generally this is what you can expect to pay per fee level.

Fee level:ETFUnit trust
Fund/ investment managementFrom 0.12% p.a.From 0.5% p.a. for passive funds
Platform/ admin/ accessDepends on the brokerage and bid-offer spread and can vary significantly0% if no platform used; commonly 0.5% p.a. for platforms
AdviserNegotiable. Normally either 0.25% or 0.5% or 0.75% p.a. depending on the size of your portfolioNegotiable. Normally either 0.25% or 0.5% or 0.75% p.a. depending on the size of your portfolio

Source: gofreedom.co.za | Satrix | Allan Gray

With ETFs, if they track a liquid and popular index the fees at fund level should be nice and low, but on platforms like Easy Equities where you cannot stipulate your trading price, just watch out for that bid-offer spread when trading is slow. (I lost 5% of my capital due to a poor bid-offer spread on Easy Equities when I was still green at buying global bond ETFs.) Tip: It’s better to not trade in the first hour of the trading day when trading is sparse and spreads are normally larger.

For unit trusts, using a platform is more costly, but a platform’s standard admin fee of 0.5% is not as bad as it seems, since the platform can normally offer you access to a cheaper class of the unit trust fund than if you went straight to the unit trust management company. In other words, with a platform, some of what you lose in platform fees you get back with lower fund fees.

If you don’t use an adviser, your adviser fees should be 0%, unless you’re buying an older-generation insurance type investment with a tied agent’s commission already worked into the pricing model. Please avoid these older types of products – they are expensive, opaque and inflexible.

Where do you find these investment fees?

This is where you go to find these investment fees.

Fee level:ETFUnit trust
Fund/ investment managementTotal investment cost (TIC) on the fund fact sheet found online. This is an annual fee.Total investment cost (TIC) on the fund fact sheet found online. This is an annual fee.
Platform/ admin/ accessAdd the brokerage fees on purchase and at sale to the bid-offer spread. Divide all of this by the number of years you’ll be invested to get an annual equivalent. Add the ongoing admin fee, if applicable.It’s surprisingly hard to find this fee online. Contact the platform if you get stuck. This is an annual fee.
AdviserYou negotiate this fee with your adviser.With non-insurance type products, you negotiate this fee with your adviser.

Source: gofreedom.co.za

1 Fees at fund level: Both an ETF and a unit trust are collective investment schemes. Both have to publish a fund fact sheet – also called an MDD – on their managers’ websites where you’ll find the total fees at fund level. You can just google it for the fund class of the fund you’re invested in – A or B1 or some other letter of the alphabet. Look for the total investment cost (TIC) on the fund fact sheet. If it’s not there, look for the total expense ratio (TER) and transaction cost (TC) instead. Then add these two figures to get the TIC.

2 Fees at platform level: These fees are harder to get hold of than the fees at fund level because there’s no law (yet) saying this specific fee has to be published in the public domain. And it can vary for the same platform, depending who’s investing. An adviser with a big book may receive a preferential platform fee rate of 0.2% p.a. while a direct client may be paying the full 0.5%. If you’re already invested, your platform or admin fee should show up on your online statement. If you’re still prospecting between different product providers, it doesn’t help that some call it an admin fee, others a product fee, or a LISP fee or another variation of fee name which might not be common. It’s best to contact the platform directly to find out what all the fees are on top of the fund’s fees.

3 Fees at adviser level: With all modern ETF and unit trust investments, your adviser fees are negotiable and you are therefore jointly in control of this figure.

Effective annual cost (EAC) is the figure that matters

If scouting for all the fees mentioned above sounds like too much work, thankfully now there is the effective annual cost (EAC) – the figure that matters most of all. It’s an industry standard and includes (almost) all the fees at all three levels. It’s not yet published in one central place online, but product providers have to provide you with the EAC on request. With Investec, for example, you have to complete and submit an EAC request form. A rare few, like Satrix, provide the EAC online. The majority of product providers need to be emailed or phoned for an EAC quote.

The EAC includes almost all your fees, or at least the fees the product provider is aware of. It excludes the fees the product provider can’t see, for example:

  • the hourly rate you agreed with your independent financial adviser
  • your bank fees when making an EFT to the product provider
  • your currency exchange fees when you’re investing offshore.

The EAC makes it possible to compare fees across product providers and different types of products. It makes it possible to fairly compare an ETF with a unit trust, or an endowment policy with a retirement annuity. The EAC is expressed as an annual percentage of your portfolio and therefore once-off fees like upfront commission and brokerage costs are converted to an annual average, depending on your investment time period.

If you’re setting up an investment product and need to understand how much the total product fee is, ask for the EAC.

Fee level:ETFUnit trust
(Almost) all levels of feesFrom 0.58% p.a. (including VAT) for the Satrix40 ETF if you invest R10 000 per month for 10 years; 0.77% if you invest a once-off R10 000 lump sum and disinvest after 10 years; assuming no adviser usedFrom 0.66% p.a. (including VAT) for the Satrix Top 40 unit trust fund, irrespective of whether you invest for 1 year or 10 years; assuming no adviser used

Source: gofreedom.co.za | Satrix

Satrix is one of the few companies that provide an EAC calculator online. Playing around with it you’ll get a feel for how the total cost of your investment varies depending on when and how long you invest.

While fees are important, never forget that being in the right asset class, eg equities instead of cash for a long-term investment, is still the most important driver of your ETF or unit trust’s performance. But unnecessarily high fees can erode that asset class’ returns pretty quickly. So stay close to what is perhaps the industry’s most useful acronym – the EAC of your investment.

Article reposted with permission from Go Freedom.

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I’m Lizelle and I have no intention to retire from a working life. Only from my corporate life. I’ve been down many paths over the past 25 years: actuarial technician; investment performance analyst; product manager; hedge fund manager; client experience designer; finance forum owner; communication specialist; coffee stall owner; and Nia teacher (much fun). And I've been on a few sabbaticals, being a strong believer in proper breaks. I’ve been a salaried worker and a freelancer, and definitely prefer the latter. So, my next goal is to up-skill, cross-skill, invest in how I see my future self and save up some reserves, so I can return to the freedom of flexible work – for good. To me, financial freedom is a process; it's not an absolute destination.

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