ETFS

Prod­ucts tar­get­ing ex­otic mar­kets and of­fer­ing niche ex­po­sures can charge sim­i­lar fees to ac­tive funds

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We show you the most ex­pen­sive ETFs on the mar­ket

Ex­change-traded funds (ETFs) have fast gained pop­u­lar­ity for their rep­u­ta­tion as a low-cost in­vest­ment op­tion. Cost­con­scious in­vestors have been at­tracted to these tracker funds be­cause of their abil­ity to track global stock mar­kets for an an­nual fee as low as 0.04%.

In­vestors should be sure to check the to­tal costs when they choose a tracker fund as not all of them are as cheap as you might think. As ETFs have be­come more pop­u­lar they have ex­panded the re­gions, as­sets and in­dices to which they of­fer ex­po­sure.

But niche in­vest­ment themes and re­mote stock mar­kets are not so easy to trade at a low cost, and the fees on some of these track­ers are start­ing to look more like those charged by ac­tive funds.

Anal­y­sis by AJ Bell shows that some ETFs have fees of up to 1%. In­deed, at least 26 track­ers charge 0.8% or more.

Adam Laird, head of ETF strat­egy at Lyxor, says: ‘There are some se­ri­ous dif­fer­ences in cost across the spec­trum of ETFs and this is par­tic­u­larly ev­i­dent on some of the niche funds, where de­mand just isn’t as strong.’

THE MOST EX­PEN­SIVE ETF

The most ex­pen­sive tracker in our anal­y­sis is the Ex­pat Bul­garia Sofix ETF (BGX), which has a hefty fee of 1% and tracks the per­for­mance of the Sofix in­dex. In­vestors may not be sur­prised that this is a con­cen­trated mar­ket and the ETF only fol­lows the 15 most liq­uid com­pa­nies on the Bul­gar­ian stock ex­change.

A high ex­po­sure to a low num­ber of stocks means per­for­mance is likely to be volatile. Phar­ma­ceu­ti­cal firm Sopharma, for ex­am­ple, ac­counts for 14.9% of the in­dex while hold­ing com­pany Chim­im­port ac­counts for 12.3% of as­sets.

Far-flung re­gions make up a con­sid­er­able pro­por­tion of the most ex­pen­sive ETFs, in­clud­ing those which track stock mar­kets in Bangladesh, Pak­istan and Viet­nam. Xtrack­ers has ETFs track­ing these mar­kets, each of which has a charge of 0.85% – sim­i­lar to what you might ex­pect to pay for a fund run by an ac­tive man­ager.

Also among the prici­est prod­ucts are those which take a the­matic ap­proach to in­vest­ing. The Os­siam ESG Low Car­bon Shiller ETF (5HEP) tracks com­pa­nies with a re­duced car­bon foot­print and good eco­nomic, so­cial and gov­er­nance (ESG) pro­file, screen­ing out busi­nesses in­volved in ac­tiv­i­ties such as to­bacco, coal and weapons. It has a fee of 0.85%.

Mean­while, the L&G Robo Global Ro­bot­ics and Au­to­ma­tion ETF (ROBG) tracks global com­pa­nies fo­cused on the ro­bot­ics and au­to­ma­tion in­dus­tries. Around half of its as­sets are in US eq­ui­ties and a fur­ther quar­ter in Ja­panese com­pa­nies, with hold­ings in­clud­ing sen­sor man­u­fac­turer Keyence and Is­raeli med­i­cal de­vice com­pany Ma­zor Ro­bot­ics. It charges 0.8%.

IN­VESTOR IN­TER­EST IS A MA­JOR FAC­TOR

One ma­jor fac­tor which

In­vestors should check a fund’s fees be­fore they in­vest be­cause there are still ex­pen­sive pock­ets within the mar­ket

de­ter­mines the price of ETFs is in­vestor in­ter­est. As funds build up their as­sets un­der man­age­ment they are able to pass on the economies of scale and start to re­duce their fees. This is par­tic­u­larly ev­i­dent among some of the cheapest ETFs, which are usu­ally sim­pler of­fer­ings track­ing a well-known stock mar­ket in­dex such as the FTSE 100 or S&P 500.

Af­ter all, the dif­fer­ence in cost to a provider of run­ning £500m or £1bn of in­vestors’ money is min­i­mal. Stronger de­mand for these prod­ucts also means there is more com­pe­ti­tion in the mar­ket, which en­cour­ages providers to keep their costs as low as pos­si­ble.

The Ex­pat Bul­garia Sofix ETF, for ex­am­ple, has as­sets un­der man­age­ment of around £12m, whereas the In­vesco S&P 500 ETF, which has charges of just 0.05%, has as­sets of around £2.8bn.

Just be­cause an ETF charges more than you had an­tic­i­pated, it doesn’t mean you should im­me­di­ately write it off. Firstly, it is worth delv­ing into the po­ten­tial re­turns – one ETF might charge 0.05% but only de­liver a re­turn of 1%, while one charg­ing 1% could grow your money by 10%.

If a fund is con­sis­tently jus­ti­fy­ing its fee then, just as with a skilled ac­tive man­ager who charges more than his or her ri­vals, it may be worth pay­ing up. But fac­tor­ing in the risk you are tak­ing on for these po­ten­tial re­turns is cru­cial.

COM­PAR­ING COSTS

In­vestors should also com­pare the costs of an ac­tive fund with a sim­i­lar man­date; if there is lit­tle dif­fer­ence in the cost, some in­vestors may pre­fer to pay a lit­tle ex­tra to em­ploy an ac­tive man­ager in­stead. It’s worth re­mem­ber­ing that tracker funds don’t aim to out­per­form, only to mir­ror the in­dex they are fol­low­ing, whereas a fund man­ager will aim to beat the mar­ket.

Laird adds: ‘The price war in ETFs is not over yet and charges are still falling, but in­vestors should check a fund’s fees be­fore they in­vest be­cause there are still ex­pen­sive pock­ets within the mar­ket.’ (HB)

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