How ETFs charge fees
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 a 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, only one in 10 LICs tracking broad global markets was able to beat a global market index ETF over the past year.
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).
Here’s what the impact of fees will do to $100,000 invested over 30 years.
|
Fee |
0% |
1% |
2% |
3% |
|
Fund balance |
$1401,778 |
$1,040,614 |
$772,312 |
$573,044 |
|
Lost to fees |
0% |
$361,164 or 25.8% |
$629,466 or 44.9% |
$828,734 or 59.1% |
Source: ASIC’s MoneySmart managed funds fee calculator
Assumptions: Initial investment amount $100,000; Investment earnings 9.2%
Frequently Asked Questions about this Article…
ETFs usually include day-to-day operating expenses, management fees, custodial services, marketing costs, and brokerage. These fees are generally lower than those of comparable investment products like managed funds or listed investment companies (LICs).
The management expense ratio (MER) for ETFs averages around 0.49%, while actively managed funds have an average MER of 1.6%. Actively managed funds also incur higher transaction costs and performance fees, which ETFs typically do not.
ETFs are often passively managed, meaning they don't incur the costs associated with trying to outperform the market. They also avoid costs related to asset sales for redemptions, which are common in managed funds.
Fees can significantly impact long-term returns due to compounding. For example, over 30 years, a 1% fee can reduce a $100,000 investment by $361,164, while a 3% fee can reduce it by $828,734.
The average MER for LICs is over 1% per annum, excluding performance fees and costs associated with higher portfolio turnover. This is higher than the average MER for ETFs, which is around 0.49%.
Yes, financial advisers typically charge annual fees between 1% and 2% of your portfolio's total value, which is higher than the average ETF fee. This excludes any one-off fees for advice statements.
In addition to ad hoc costs, SMSFs incur accounting and audit/admin costs of around $2,000 annually.
ETF fees are subtracted from the net asset value (NAV) of the portfolio daily and don't appear on investor statements. Being aware of these fees is crucial because they compound over time and can significantly impact your investment returns.
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