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How ETFs charge fees

Mon 07 Feb 22, 12:26pm (AEST)
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Key Points

  • ETFs are low-cost investments
  • Fees compound over time, just like portfolio assets
  • It’s incumbent on you to find out what fees you're paying

While it’s generally acknowledged that fees charged by ETFs are low-cost investments, precious little is known about what fees they charge and why.

With that in mind, Market Index has outlined everything you need to know about ETFs and fees to help you make better informed decisions.

Why ETFs typically command lower fees

Generally speaking, ETFs are low-cost investments, but the fees they charge depend on the market, region, or industry that a fund is tracking.

While they typically include day-to-day operating expenses, management fees, custodial services, marketing costs and brokerage, ETFs usually have lower total expenses - aka management expense ratios (MERs) - than comparable investment products, like (unlisted) managed funds or listed investment companies (LICs).

Actively managed funds command higher fees (than ETFs) to cover expensive research and higher transaction costs, plus performance fees - in the hope they’ll outperform a particular index.

By comparison, most ETFs are designed to be passively managed, and hence don’t carry the costs associated with trying to beat the market. Nor do they bear the costs associated with having to sell some assets to cover the redemption when a unitholder wants to exit a managed fund.

How ETF fees compare

The MER for ETFs averages out at 0.49%, compared with 1.6% for active managed funds.

While active managers need to outperform their relevant benchmarks by at least the management fee percentage before adding value to investors, 81% have failed to so over 10 years.

By comparison, the average MER of an LIC is over 1% p.a, excluding performance fees and/or costs associated with higher portfolio turnover. But despite higher fees, LICs tracking broad global markets have typically struggled to beat a global market index ETF in recent years.

Managed funds and LICs aside, financial advisers typically charge annual fees of between 1% and 2% of the total value of your portfolio, which excludes a one-off fee for a statement of advice, (around $1,500).

While the fees charged by investment platforms depends on the range of services investors choose, they tend to be around 1% of the assets held within it.

Then there are self-managed super funds (SMSF) which in additional to ad hoc costs, will incur accounting and audit/admin costs of around $2,000 annually.

Fees are wealth destroying

Given that ETF fees are subtracted from the net asset value (NAV) of the portfolio daily - and hence don’t appear on any investor’s statement - it’s incumbent on you to find out what they are.

If you think higher fees have little overall impact on your returns, think again.

Because fees compound over time, just like portfolio assets, the longer the investing period, the bigger the loss (see table).

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Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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