One of the main points that an investor needs to pay attention to is the investment cost. The less you pay to various financial intermediaries, the better the result of your investment will be.
Let's consider what costs arise when investing funds in ETFs and PIFs. For convenience, we divide the main costs into four categories:
- preliminary costs
- acquisition costs
- share ownership costs
- redemption / exchange / sale of shares
This category includes costs that will need to be incurred, carrying out preliminary preparation before starting investment. These are the costs of processing, sending documents and transferring invested funds.
When investing in PIFs, the value of all these costs can be reduced to zero. If there is a sales office of the selected mutual fund in your city, you can come there and apply for the acquisition of shares without incurring any costs. Having made a contribution to purchase units through a cash desk in a sales office or by making a ruble payment from an account opened with the same bank as the fund management company’s account, you may not pay a fee for transferring funds to purchase units.
However, when investing in ETFs, the above costs will often be incurred. Consider this by the example of acquiring ETF units through a foreign broker.
When concluding an agreement to open a brokerage account, some foreign brokers may sometimes ask you to provide originals of a number of documents (for example, the original tax form W-8BEN, filled out when opening an account with American brokers; this form confirms that you are not a US resident and are going to pay taxes In your country). As a result, you will need to forward these documents abroad either by regular or express mail. In the first case, the shipping costs will be small – only a few hundred rubles. However, documents can go to the addressee long enough (from 2-3 weeks or more). In the second case, you will have to pay up to several thousand rubles, but the documents will reach the addressee much faster.
After opening a brokerage account, you will need to transfer funds to it. For accounts opened with foreign brokers, this transfer will need to be done in foreign currency. The bank commission for foreign currency transfer, depending on the bank, will be from 0.2% to several% of the payment amount. In this case, banks usually set a minimum fee, which in any case will be taken for the transfer. As a rule, its size is from $ 15 or 15 euros and above.
Summarizing all the above, we can conclude that the upfront costs when investing in mutual funds will be less than when investing in ETFs.
Share acquisition costs
This category of costs includes premiums that can be set when purchasing shares of PIFs, as well as commissions when purchasing shares of ETFs and PIFs on the exchange.
In the case of acquiring PIF units through the management company, you may pay a premium that increases the value of the unit and, accordingly, reduces the number of units acquired. This allowance may be up to 1.5% of the invested amount. For different funds, the amount of the premium is different and may vary depending on the amount invested – the higher the amount transferred to the fund, the lower the premium. However, often there is no allowance for the acquisition of shares of Pythos.
It is worth noting that when buying shares of Pifs from fund agents (i.e., from third-party organizations acting as sellers of shares), there may be an additional premium for the agent, which will also reduce the number of shares acquired by the investor.
When acquiring ETF shares, there are no surcharges. However, since shares of exchange funds are acquired on the stock exchange, you will have to pay a commission for the transaction of the organization through which you will do this. For example, if you buy ETF shares through a broker, you will pay a brokerage fee. It should be taken into account exactly how the brokerage commission for the transaction is calculated. It can be calculated as a percentage of the transaction amount, as a fixed fee for the purchase of each security, or as a fixed fee for the whole transaction, excluding the number of securities and the transaction amount. The most common among foreign brokers is the last option – when a fixed transaction fee is paid (for example, with American brokers, the average transaction fee is about $ 6). In such a situation, it is best to purchase ETF units immediately for a large amount. Splitting the acquisition of units of the same ETF into several transactions with small amounts will be unprofitable, because You will pay a commission for each such transaction.
Some foreign brokers may not charge a fee for acquiring shares of certain ETFs at all. The list of such “free” ETFs (if any) can usually be found on the broker's website.
When acquiring ETF units, in addition to the transaction fee, the broker may establish some additional fees. For example, a fee for using a trading program through which transactions are carried out. Nevertheless, there may not be any additional commissions from the broker.
The information on brokerage commissions indicated above also applies to cases of buying shares of Pifs on Russian exchanges.
The premium for the acquisition of shares of Pifs and the brokerage commission will be one-time expenses. A greater impact on the result of investments will have the costs that you will incur in ownership of shares, as these costs will be paid annually.
Costs of ownership of shares; expenses of ownership of shares
This category includes commissions that are paid annually from the funds of unit owners.
When investing in mutual funds, the costs of owning shares are composed of the following commissions:
- management company remuneration – payment for investor money management services;
- remuneration of the depositary, registrar, auditor – payment for services for the storage of acquired securities, maintaining the register of unit holders, services of the fund auditor;
- other expenses (expenses related to trust management of property) – this includes, for example, advertising costs, brokerage commissions and other expenses.
These amounts in different funds can vary greatly. The lowest costs are incurred by the holders of the units of index Pifs. If in some PIFs the sum of costs in the ownership of shares can reach a huge 10% of the total assets under management, then there are index funds with commissions in the range of 1.6% – 2.8%. For example, the owner of shares in the Raiffeisen Index MICEX Fund will bear annual costs of 2.75% of the amount invested. True, there are funds among the index Pifs that manage to take 5 percent or more for their services.
According to the site Investfunds.ru at the beginning of 2013, the total range of commissions in index Pifs was from 1.6% to 9%. The average level of commissions is about 3.82%.
The value of these costs in ETFs is much lower than in Pifs. The total fees paid by ETF unit holders are usually in the range of 0.04% to 1%. Quite rarely, commissions of exchange funds cross the border at 1%. And only some “unique” exchange-traded funds have commissions of about 2%. The average value of commissions in exchange-traded funds according to the American information-analytical company Lipper Inc. is 0.53%. And, for example, the Vanguard Group exchange funds do have an average level of commissions of 0.17%. So, the commission of the Vanguard S&P 500 ETF (VOO) stock exchange fund is only 0.05% of the total assets under management.
The low commissions of exchange-traded funds, in comparison with Pifs, can be explained, first of all, by the fact that the value of assets managed by ETF is much higher than the value of assets managed by Russian Pifs. And the average foreign ETF will be larger than the average Russian mutual fund. For example, the largest Russian mutual fund “Reserve” of the management company “Trust Investment Company” as of May 31, 2013, according to data from investfunds.ru, had assets under management equal to 14.38 billion rubles. or about $ 455 million. With this amount of assets, it would be outside the first hundred of the largest US ETFs. The total assets of the last (100th) ETF in this list is about $ 3 billion.
The commission in the amount of tenths of a percent of the large amount of assets of a foreign ETF fully ensures the activities of the management company of the stock exchange fund. In turn, Russian management companies, in order to cover their expenses, are forced to set a higher fee, because the amount of assets under their management is not as large as in the ETF.
At the same time, we do not take into account cases of possible deliberate and unreasonable overestimation of commissions by the management company (among ETFs this may be characteristic, rather than for index funds, but for actively managed exchange funds, but among Russian Pifs this can also be seen at index, and any other mutual investment funds).
Another reason for lower ETF fees is that exchange-traded fund managers do not work directly with investors. ETF units are only available on the exchange. Therefore, the management company does not bear the costs of organizing the sale of its shares – for renting offices, paying for the work of personnel involved in the sale of shares, etc. In addition, all interaction with investors is shifted to brokerage firms. It is with his broker, and not with the management company ETF, that the investor will communicate if he has any questions about the ownership of shares of exchange-traded funds. Information about the state of the account, the amount of tax paid by the investor is sent out by the broker, and not the ETF management company. This can significantly reduce the overhead costs of exchange funds. In Russia, the management companies of Pifov deal with all these issues. Which, in turn, is reflected in the level of mutual fund commissions.
Thus, in terms of the level of annual commissions when holding shares, exchange-traded funds are more attractive for investors than Pifs.
However, in the ownership of ETFs, so-called implicit costs may exist. First of all, additional commissions from the stock broker. For example, if an investor performs few operations over a certain period of time, some brokers (although by no means all) may charge an additional fee for maintaining a client’s brokerage account (commission for inactivity, for example, $ 10 / month). The total amount of additional costs can be quite impressive. Therefore, you need to carefully approach the choice of financial institution through which you will invest, and clearly know its tariffs for services.
Costs for redemption / sale of units; costs for redemption, sale of shares
This category includes the discounts of the management company for the redemption of units of PIFs and the brokerage commission for the sale of ETF or PIF units on the exchange.
In case of redemption of units of Pifs through a management company, an investor may be charged a discount that reduces the amount received by the investor. Usually this is not more than 3% of the repayment amount, and its size depends on the period during which the units belonged to the investor. If this period is long enough, then such a discount may not be charged. Often, when holding units for more than three years, you will not pay a discount on repayment. However, for different funds the size and terms of the discount are different.
ETF units cannot be redeemed, like Pif units, through a management company. You can only sell them on the exchange to another market participant. When you sell shares of exchange-traded funds through a broker, as in the case of the sale of shares of companies on the exchange, you pay a commission for the transaction. No management company discount will be charged. However, in order to withdraw received funds to your bank account after the sale of units, you usually have to pay a commission for withdrawal. For example, with American brokers it is an average of $ 40.5, regardless of the amount withdrawn. Although sometimes such a commission may not exist.
Summing up, it can be noted that in terms of the annual commissions paid by the investor, which have the greatest impact on the result of investments, exchange-traded funds are much less expensive than Pifs.
However, investing in ETFs incurs costs for sending documents, transferring funds and commissions to financial institutions through which the investment is made. Nevertheless, when investing money in any foreign assets, and not just in ETFs, through access to foreign markets, all these costs cannot be completely avoided, in any case, it will not be possible. You can only reduce their value.