Individual Investors

composed-banner-left

How to Pick the Right ETF? Part 4

composed-banner-right-article.png

View Part 3 | Liquidity

Part 4 | Fees

Fees are always an important consideration for ETFs. The lower the fees taken by an asset manager, the more money there is for investors. But there are more to ETF fees than meets the eye. Below is a guide.

Why are some ETF fees higher than others?

There are many components to an ETF fee. Like other products in our economy – be it shoes, phones, or cars – the cost (fee) of an ETF is largely a function of input costs. When input costs are higher, products become more expensive. Input costs for ETFs include, but are not limited to:

  • Exchange fees (exchanges charge ETF providers to put ETFs on exchange);

  • Index licensing fees, to build and maintain the index;

  • Share registry fees, which communicate with investors;

  • Custodian fees, for the banks that hold the ETF’s assets.

These fees are all charged to ETF providers by external companies and are included in an ETF’s fee. The costs of these inputs partially explains the variance of fees between ETFs. For example, gold ETFs globally have higher fees than ETFs holding shares and bonds, due to the higher custodian and storage costs (Gold bullion requires storage in ultra-secure bank vaults). Another example: emerging markets ETFs have higher fees than developed market ETF fees, due to the higher administration, custody and brokerage costs in emerging nations.

ETF providers then have their own fees, which come on top of this. The final fee that an investor sees – the ETF management fee – is inclusive of all the input costs and ETF providers’ own margins.

Active ETFs charge extra performance fees

Some actively managed ETFs – sometimes called quoted managed funds, or EQMFs – charge an additional layer of performance fees. These come on top of management fees and mean that investors are paying two layers of fees. Performance fees can catch investors by surprise, as they can be calculated in sophisticated ways, such as against an arbitrary benchmark and over an arbitrary period (such as six months).

Actively managed ETFs have significantly higher average fees

Actively_managed_ET_Fs_have_significantly_higher_average_fees_237ba92c47.pngSource: ASX, data as of 31 August 2021

ETF Securities, as a firm, NEVER charges performance fees.

View Part 5 | Dividends