‘Low Cost’ Nature Of ETFs Lost In Translation

ETF providers are earning far more from their funds than their “low cost” reputation suggests by failing to pass on the significant earnings from securities lending and collateral, according to research from Deutsche Bank. But when it comes to many Asian markets, it’s not clear that ETFs offer investors a low cost product anyway.

Certainly, fees in some countries are low and falling. Australia has been in a price war ever since the entry of Vanguard and fees of between 0.25 percent and 0.45 percent are typical for new launches. Vanguard is even offering its main market tracker for just 0.15 percent.

Korea’s highly active ETF market—which saw a rush of new products again this month—mostly prices products at 0.2 percent to 0.5 percent. And 0.2 percent to 0.35 percent seems to be standard among most Japanese providers these days, although international products are often more expensive.

But in the least mature markets, it’s a very different story. About 0.5 percent is standard in mainland China—but direct investment in ETFs there is an institutional market. Retail clients are sold feeder funds that invest in these products, which typically lay another 1 percent to 1.5 percent in costs on top.

And in India, 1 percent to 1.5 percent is the standard TER. Of course, the Indian ETF market remains quite small with low assets under management for most funds. So this could reflect high fixed costs. But a look at the documentation for one of two new Indian releases this month would suggest not.

The fund carries a total estimated TER of 1.5 percent, of which true fund costs such as custodian fees and investor communications total just 0.4 percent. Instead the two biggest items are marketing and selling expenses of 0.6 percent and an investment management and advisory fee of 0.75 percent. It’s entirely plausible that the fund might only draw in US$10-20 million—but in many ETF markets, the TER even for a fund of that size would be less than the management fee alone.

However, it’s in Hong Kong where the largest number of investors may be getting a raw deal. There are a substantial number of products charging 1 percent or more, mostly Chinese A share products. Of course, it could be the case that they have exceptionally high costs due to the unique difficulties of accessing the mainland markets.

However, a cynic might conclude that providers would be quite happy to make extra fees from investors’ enthusiasm to get at these markets. And the fact that db x-trackers has a suite of A share products on a TER of 0.5 percent suggests that it can be done more cheaply, if that was really the goal. Once again, investors simply don’t seem to be checking fees and going with the best deal—in which case, it’s no wonder providers seem to be doing rather well.

Mirae adds funds in Korea and overseas

After several busy months, new launches in Asian ETF markets have been a little quieter lately. Most activity came from Korea, where we saw six new listings from four providers. Mirae led the way with three new additions to its Tiger ETF range. The Tiger S&P 500 Futures tracks the performance of the S&P Futures Excess Return Index, which captures the return on US stocks in excess of the return on long-term government bonds.

The Tiger Inverse KTB 3Y is a fixed income-linked product, delivering the inverse daily return on the three-year Korean government bond futures contract. And the Tiger Health Care is the latest addition to Mirae’s line-up of Korean sector trackers, following the KRX Health Care sub-index. The TER for the first two is 0.3 percent, while the last is 0.4 percent.

Samsung’s new Kodex ETF, the Kodex Silver Futures, is pretty self-explanatory. The benchmark is the S&P GCSI Silver Index Total Return and the TER is 0.68 percent. Rounding out the new arrivals, we saw two fundamental products, both focused on the large cap space, one from Woori and one from Korea Investment Management. What’s more, both apparently track the same index, the FnGuide-RAFI Fundamental Large, from Korean firm FnIndex and fundamental indexing pioneer Research Affiliates.

The index includes 100 large stocks, weighted on value criteria. The Woori Kosef Fundamental Large has a TER of 0.4 percent, while the KIM Kindex Fundamental Large has a maximum management charge of 0.27 percent; additional costs weren’t listed.

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