No, the ETF own­ers are not rip­ping you off

Finweek English Edition - - Market Place - Ed­i­to­rial@fin­week.co.za

ex­change-

traded funds (ETFs) pay div­i­dends all the time; some quar­terly, some bi-an­nu­ally. But in July when I tweeted about re­ceiv­ing my db X-tracker div­i­dends, my Twit­ter fol­low­ers went crazy, telling me about the fees and taxes that had been de­ducted.

The is­sue was that the div­i­dend an­nounce­ment had also in­cluded a de­tailed break­down of the taxes and costs that are sub­tracted from the div­i­dend. It seems that some bro­kers had, for the first time, put all the de­tails into the cash state­ment on client ac­counts.

For many, this was the first time they’d seen a break­down of th­ese sub­trac­tions.

I am one of the few div­i­dends nerds who al­ways reads the Sens, so I knew what was be­ing paid in taxes and fees. But it seemed that many Twit­ter users had not no­ticed it be­fore, with many mak­ing claims of fee goug­ing and mas­sive fee in­creases.

Us­ing the DBXWD* (which I will use as the ex­am­ple as it’s very pop­u­lar and I hold it), the fee was about 24% of the div­i­dend, with taxes mak­ing up an­other 16%. On the sur­face this may seem high, but no, this is not new. And Syg­nia, as new owner of th­ese ETFs, is not sud­denly rip­ping off the ETF holder, as some peo­ple sug­gested.

Let’s dig into the de­tails as pub­lished. The div­i­dend was first de­clared in early July, but with the val­ues in US dol­lars as that is the base cur­rency of the ETF. Syg­nia then is­sued a

Sens with cur­rency con­ver­sion rates and rand de­tails of the div­i­dend.

It seems that many hold­ers of ex­change-traded funds (ETFs) do not fully un­der­stand the fees that are de­ducted from div­i­dends. Check­ing the Sens from 26 July 2017 we see the fol­low­ing de­clared:

■ Gross for­eign div­i­dends of 33.791c (all fig­ures in rand);

■ Less: For­eign with­hold­ing tax of 5.49c;

■ Plus: For­eign ex­change gain of 0.038c; ■ Plus: Equal­i­sa­tion of 0.405c;

■ Less: Man­age­ment fee of 8.114c;

There is com­plete trans­parency so, while we cer­tainly do pay fees, they are nei­ther ex­ces­sive nor are they a se­cret.

So, the man­age­ment fee of 8.114c equates to some 24% of the div­i­dend.

Sure, 24% of the div­i­dend in one half seems high, but as a per­cent­age of the ETF price, which is trad­ing at around 2 530c, it is some 0.32% of the ETF value.

Com­par­ing that against just the div­i­dend serves no pur­pose. We need to mea­sure it against the cost of the ETF to find the ac­tual to­tal ex­pense ra­tio (TER). As a bi-an­nual fee we dou­ble it and this would then be a 0.64% TER. When I check the fact sheet as pub­lished on 30 June, Deutsche Bank claims a TER of 0.68%. So, this 8.114c fee is ac­tu­ally slightly below the stated TER.

The point is that there is com­plete trans­parency. So, while we cer­tainly do pay fees, they are nei­ther ex­ces­sive nor are they a se­cret. And I very much do like the full break­down as pub­lished on Sens.

The other is­sue was the tax be­ing paid. Un­for­tu­nately, this is a re­al­ity and we have to pay lo­cal and for­eign tax on div­i­dends, and lo­cally that rate has in­creased to 20%.

You’ll note no lo­cal tax men­tioned above but that is re­moved at the last step and is de­tailed on your cash state­ment with your bro­ker.

That said, we can avoid the lo­cal tax pay­ment of 20% by hold­ing the ETFs in a tax-free ac­count. That way, you will still pay some for­eign tax but you will save on the lo­cal div­i­dend with­hold­ing tax.

A very last point is that be­cause fees are taken out of ETF div­i­dends, typ­i­cally ETF div­i­dend yields are mod­est, of­ten even for div­i­dend-style ETFs such as prop­erty and high-yield­ing smart beta ETFs. ■ *The writer owns DBXWD.

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