Cost challenge confronts Sygnia buy-in
FORCES A RETHINK AS ETF UNIVERSE OPENS UP Sygnia’s recent purchase of db x-trackers gives it access to marketing ETFs to clients, but now repeated criticisms of high costs associated with ETFs present a significant hurdle.
Last week Sygnia announced it had reached an agreement to acquire the db x-trackers exchange-traded funds (ETFs) from Deutsche Bank. The listed asset manager said that the deal was worth R320 million.
The news raised eyebrows because Sygnia, a vocal proponent of index tracking, has criticised South Africa’s ETF industry for not offering a cost-effective way to access the market. But Sygnia CEO Magda Wierzycka, says the deal doesn’t change her mind.
“ETF management fees themselves are quite reasonable, but for an investor to invest in one, you are looking at trading costs, stockbroking commission, bid-offer spreads, and the cost of investment plans, which all add another layer of cost.
“When you start adding all of these together, the fee is commensurate with an actively managed unit trust,” she says.
Sygnia’s aim will be to reduce and even eliminate these fees for accessing ETFs, and offer them in as raw a form as possible.
“The annual fees on investment plans currently range from 0.7% to 1.0% per annum,” Wierzycka says. “We want to place these ETFs on our platform as close to no cost as possible. The stockbroking through Sygnia Securities will also be minimal – below 10 basis points.”
While this argument is persuasive, Sygnia will have to compete with platforms that already offer extremely low-cost access to ETFs. Absa Stockbrokers, Easy Equities and SatrixNOW already offer discounted brokerage on ETFs and no annual fees.
Sygnia will have to find a way to differentiate itself.
Wierzycka believes scope also exists to slash ETF trading costs by engaging the JSE. In addition, Sygnia plans to speak to international market makers to narrow the bid-offer spreads.
Competition is increasing and Wierzycka suggests this may be an opportunity to look at alternative listings.
“It will boil down to fees,” she says. “If other exchanges can offer these products and are willing to list them at lower cost, then either the JSE will have to come to the party or we will look at the alternatives.”
An immediate challenge confronting Sygnia is that db x-trackers products are the most expensive ETFs on the JSE. Although their fees do work on a sliding scale, their initial total expense ratios (TERs) of 0.85% are nearly double those of the only other foreign ETFs listed on the local market managed by CoreShares. These will almost certainly have to come down. Sygnia will also have to ensure any new products carry much lower fees.
“We would like to launch international bond and international listed property ETFs, as well as one that tracks our fourth Industrial Revolution Global Equity Fund,” Wierzycka says.
Wierzycka adds the company will be re-branding to Sygnia Itrix.
‘ When you start adding all of these together, the fee is commensurate with an actively managed unit trust’