The cost factor: ETFs vs Unit Trusts

ETFs generally offer a compellingly lower overall cost structure than unit trusts, even when financial advisor commissions are taken into account.

Investing in Collective Investment Schemes, such as Exchange Traded Funds (ETFs) or unit trusts, involve a chain of costs which combine to reduce the net performance for the investor. Clearly, the lower the effective cost to the investor, the better the return over the life of the investment.

Total Expense Ratios (TERs)

The TER measures the expenses paid by a CIS fund in the management of the portfolio. These expenses are deducted from the value of the portfolio and therefore impact the performance of the fund. The TER is included in the price of the CIS unit, so it is not payable directly by the investor.

Exchange Traded Funds, because of their passive investment mandates and because all settlement, clearance, registration and transfer take place electronically, centrally and cost effectively through the Stock Exchange, have significantly lower TERs than most unit trusts. The average TER for an ETF is around 0,5% per annum, whereas TERs for unit trusts range from 1% to 4% per year.

Platform fees

Most collective investment schemes are bought and sold through investment platforms, typically registered as linked service providers (LISPs).

ETFs differ in that they can be transacted, not only through the stock market utilising stockbroking companies, but can also be transacted on investment platforms.

LISPs and other platforms charge an annual fee, typically around 1%. ETFs can be purchased through investment platforms where the annual fees range from 0.45% to 0.8% per annum.

Fund management fees

These are annual charges levied by the manager of the unit trust to the investor, through the LISP or investment platform. These fees typically range between 1% to 2% of the value of assets, levied annually. ETFs do not charge this fee, a significant cost saving to investors.

Financial advisor commissions

Financial intermediary fees gravitate to between 1% and 2% per annum, with trailing fees replacing upfront fees.

Performance fees

Performance fees are becoming increasingly common and the manager can typically take between 10% and 30% of the “outperformance” in extra fees. ETFs do not typically charge performance fees as they do not seek to outperform the index.

                                              Comparative Fee and Cost Structures
                       Unit Trusts vs Exchange Traded Funds (ETFs)-(% of asset per annum)
                                                              Unit Trusts                                 ETFs
Total Expense Ratios (TERs) (average)   1,5% to 2,5%                              0,5%
Investment Platforms                               0,5% to 1,0%                              0,45% to 0,8%*
Fund Manager Fees                                1,0% to 2,0%                              n/a
Financial Advisor Commissions               1,0% to 5,0%                              1,0%*+
Performance Fees                                   10%-30% of outperformance       n/a
Totals                                                     4,0% to 10,5%                          0,95% to 2,3%
Notes
i)* Fees charged on etfSA Investor SchemeTM platform.
ii)These are representative charges ascertained from a sample of unit trust and ETF companies.