Educated investors wise up to ETF benefits

Low-cost exchange traded funds (ETFs) are riding high on a flood of information about the impact of fees on investment performance, according to db x-trackers, the JSE-listed ETFs offering exposure to major overseas markets.

A growing body of positive research – most easily accessible on the Net – is contributing to the rising popularity of this form of passive investment, says Wehmeyer Ferreira, head of db x-trackers in South Africa. 

“Research and readily available information on the advantages of ETF investment have been highly beneficial in educating the retail investor,” he notes. “We find today’s investor is increasingly knowledgeable about the role of ETFs as a core investment vehicle 

“Information flows have also fostered market education around the impact of high fees on long-term performance. 

“In this environment, our management fee of less than 1% clearly creates a favourable impression. The net effect is to encourage growing product trial, not only among private investors, but also among institutions.” 

ETFs deliver market-related returns. As the product tracks a specific index rather than trying to beat the market, it is possible to levy lower fees than active investment products. 

In contrast, some active investment funds may pass on layered fees that might cover management costs, performance fees, advisory services, administration and other charges. 

As fees rise, so does their impact on investment returns, a point highlighted by more and more research. One investment information platform recently revealed that 3% in fees could deplete optimum returns by more than 45% over a 20 year period.

At db x-trackers, the maximum management fee, including VAT, is 0.855% while the management fee on the db x-tracker MSCI World Index EFT, is just 0.684%, including VAT. 

Says Ferreira: “Continued positive information on issues like this have put ETFs on the radar and led to significant inflows. For example, assets under management at db x-trackers have grown by 22.2%over the last year. 

“In our case, inflows are not only driven by awareness of low ETF costs. Db x-trackers also offer a simple, highly affordable route to offshore diversification. Our five funds are listed locally yet simultaneously create access to the world’s biggest developed markets. It’s a very cost-effective and accessible way of going offshore. 

“Of course, proven performance also triggers product trial.” 

•   Two ETFs from the db x-trackers range recently took honours in the annual Morningstar Awards. The db x-tracker MSCI USA fund won the Regional Offshore Equity Fund category with an annual return of 23.67% while the MSCI World fund took second place in the Global Equity Fund category with a one-year return of 15.20%.