Transaction fees, measured as a percentage of invested assets, have the potential to increase an ETF’s ongoing charge figure (OCF) by as much as 500%, according to a study by Fitz Partners.
Hugues Gillibert, CEO of Fitz Partners.
The research involved calculating transaction fees from audited fund accounts and measuring the impact they would have on a fund’s OCF when both costs are aggregated.
The London-based independent fund research company found that the relative increase in an ETF’s OCF due to the addition of transaction fees averaged 26%. This was approximately in the middle of the average increase in OCF due to transactions costs for equity mutual funds (21%) and index tracking mutual funds (29%).
Hugues Gillibert, CEO of Fitz Partners, said: “Adding 20bps of trading fees to an OCF of 100bps is not really welcome, but certainly not as impactful as adding the same 20bps to a lower OCF of say 25bps.”
Fitz Partners found that the impact of transaction costs on some cheaper ETFs was significant, representing a total cost of as much as five times the stated fees in some cases, meaning costs were more aligned with some active funds.
Furthermore, despite growing negative sentiment in the industry towards ‘closet tracking’ mutual funds, Fitz Partners found such funds may actually be cheaper than ETFs when trading costs were factored into a total cost analysis.
“Our research shows that whatever the product, managing money requires transactions and attracts costs,” said Gillibert. “The growth in smart beta ETFs is one of the reasons for the overall increase in trading costs for ETFs. Remarkably, index tracker funds remain on average better value after trading costs, when comparing with ETFs.”
Responding to the concern that, as the research shows, a quoted OCF on its own may not be an appropriate proxy for total costs borne by the investor, and the fact that trading costs can challenge the perception of ETF’s cost-value proposition, Gillibert said: “In the last few years, most funds, including ETFs, have been lowering their OCFs quoted to investors. With the implementation of MiFID II, trading costs will become more transparent and allow investors to refine their investment choice.
“The industry will benefit from further transparency on trading costs and it would be best disclosed at the point of investment alongside the fund’s OCF and subscription charges as well as platform fees.”