Time-poor investors have increasingly turned to passive funds as they don’t have the time to cherry-pick stocks themselves and don’t want to pay high fees for active funds. It is no wonder then, that the exchange-traded fund (ETF) industry has flourished as a result.
According to Morningstar research, the amount held in European-domiciled ETFs has more than doubled over the past five years, with ETFs accounting for 8.6% of total assets under management as of March 2019.
ETFs are not new products – the first tracker listed on the London Stock Exchange back in 2000 – but they have matured over the subsequent two decades. Competition has increased and prices have fallen as a strong demand for these tracker funds has sparked a proliferation of new products.
Nowadays, price is one of the first things investors look at before investing their money. That’s unsurprising, given the huge impact that fees can have on total returns, especially when high charges compound over the years.
Research by Vanguard has found that a £100 investment into a fund with fees of 0.25% would be eroded to £96.31 after 25 years, assuming no growth. The same investment in a fund charging 1% would be worth just £86.01 after that time.
ETFs That Track the FTSE 100
But analysis shows that price is not the only factor to consider when investing in ETFs. According to Morningstar Direct data, there are ten ETFs, from eight distributors, that track the FTSE 100 in a plain, vanilla way.
ETF Distributors by Fees
The fees on these range from 0.07%, charged by HSBC and BlackRock, up to 0.24% charged by Amundi. On a £1,000 investment these fees equate to 70p and £2.40 a year – while they are both small amounts, the Amundi fund costs more than three times as much, which will eat into returns over time.
While it is often the case with investment funds that older products are more expensive, the BlackRock iShares FTSE 100 tracker is actually the oldest on the list, having launched in 2000. The UBS fund, which charges 0.2%, launched in 2001.
But different asset managers have different cost structures. Mark Fitzgerald, head of ETF product management at Vanguard, says charges often depend on licenses and agreements for the price of the index, as well as factors such as administrator or custody costs.
Other aspects which affect fees include how large a fund is, how well-resourced the management group is and whether the ETF uses physical or synthetic replication when it is tracking the index. Our recent ETF Due Diligence series took an in-depth look at the set-up at some of the major ETF providers including Amundi, Vanguard and UBS.
Given how charges eat into returns it is, perhaps, unsurprising to see that the cheapest products have produced the greatest returns over a three-year period.
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iShares has produced the best return across the group, up 6.3% over three years. As well as being among the cheapest and best-performing funds, it also has a hefty £6.9 billion of assets under management.
The impact of higher charges is evident in UBS fund’s performance – it has returned 5.2% over three years and 5.7% over five years. Over a one-year period, however, the UBS tracker is the strongest of the group, down 1.5% over the period.
But “you don’t want to rely solely on the price of an ETF,” Fitzgerald warns. Instead, investors should also take into account other factors, such as the spread, how expensive it is to trade, tracking error (that is, how closely it follows its chosen index) and, above all, the performance over the long-term.
Adam Laird, head of ETF Strategy at Lyxor, agrees that charges should not be the only thing to take into consideration when taking a decision. He believes it is better to have a look at the bigger picture. “Don’t buy an investment that is inappropriate to your portfolio just because it’s cheap”, he advises.
