The Cheapest Way to Buy ETFs

Warren Ingram, a Financial Services Provider, published an article on Moneyweb on 5^th October 2011, (http://www.moneyweb.co.za/mw/view/mw/en/page311172?oid=553583&sn=2009%20Detail) which suggests that investing through online stockbrokers or the internet banking facilities, provided by certain banks that allow monthly investment in some shares, is far cheaper than using a specialised platform, such as the etfSA Investor Scheme^®, or the Satrix Investment Plan, for investing in ETFs.

Mr Ingram bases his findings that online brokers offer the cheapest way to invest in ETFs, particularly for debit order investments between R1000 to R8000 per month, on research provided by a Mr Viljoen. This advice is completely wrong as is shown in the tables attached, which I have drawn up, after consulting the websites, call centres and agents of the various internet banking services and online brokers quoted in Mr Ingram’s report.

Lump sum Investments

A R1000 lump sum investment done through etfSA or Satrix Investment Platforms (both have exactly the same fees), would cost, all inclusively, R10 over 1 year and R84 over 10 years. etfSA provides access to all 45 ETFs/ETNs available in South Africa, Satrix provides access only to its seven products.

A similar investment of R1000 through the online brokers would cost between R354 and R706 per year, depending on the minimum broking rate and the fixed monthly admin fees charged. Some online brokers waive the monthly transaction fees, provided a minimum number of trades are done per month/year, but this works out more expensive than paying the monthly online fee as the minimum brokerage rates then kick in for each of the required number of transactions.

Only when once-off investments are in the region of R200 000 do the online brokers become competitive, as their fixed fees offset the sliding scale admin fees of etfSA/Satrix.

Reinvestment of Dividends

However, most investors would want to reinvest the four dividends a year they receive from ETFs. Through an online stockbroker, the minimum brokerage charge is applicable for each quarterly transaction and the annual management fee also needs to be taken into account. With etfSA/Satrix, the annual management fee covers all the costs of the administration, including the four dividend reinvestment trades, and brokerage rates are 0,1% per trade.

For a R200 000 investment, which, we assume, pays an annual 3% dividend yield (R6000 per year, or R1500 per quarter) and a R1 000 000 investment, with an annual dividend of R30000, the following costs are incurred:

Accordingly, for investors who have invested large sums in ETFs, between R200000 to R1000000 or even more, if they wish to capitalise their dividends – and most investment research suggests that dividends should be reinvested for long-term performance - the services provided by etfSA/Satrix for this specific purpose are far cheaper than the online brokers.

Debit Orders

etfSA/Satrix facilitate debit orders from R300 (etfSA in all ETFs/ETNs, Satrix in their own 7 products), brokerage rates are 0,1% per trade, debit orders are R3,50 per trade and an annual management fee of 0,45% to 0,8% covers all investment costs. However for stockbrokers, the minimum brokerage rates apply for each of debit order amounts as do the fixed monthly fees.

For a R1000 per month debit order, the etfSA/Satrix Investment Platforms charge R111 per year, the next cheapest option is ASI (Auto Share Investment), which charges R360 per year, over 3 times as much. Standard On-Line, which does not according to its call centre, have monthly debit order facilities, and referred me to ASI, would cost R1200 per year, if you did a fixed monthly investment of R1000 over 12 months

To Summarise

i) For lump sum investments, up to around R200 000, the etfSA option is very competitive, unless you are holding on to your once off investment for a number of years. In which case the lower annual management fees of the stockbrokers helps swing the scales in their favour, but only for investments in excess of R100 000 and after a period of 4-8 years, depending on the broker used.