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Trackers' fees often higher than those advertised

Index tracking funds and ETFs
richfool
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Trackers' fees often higher than those advertised

#414520

Postby richfool » May 24th, 2021, 9:31 am

An article in the Telegraph pointing out that trackers' fees are often higher than those advertised. (It appears to relate to the transaction costs).

The article may be behind a paywall or require registration to access.
Revealed: £54bn in ‘cheap’ tracker funds charge double the headline fee
Investors buying “cheap” tracker funds are paying fees up to five times higher than advertised rates after volatile markets led to a surge in transaction costs.

Savers invested in these funds, which mimic the performance of stock markets and are lauded for their low charges, are being hit with a rise in hidden costs since the pandemic.

Telegraph Money has found that tracker funds running a combined £54bn of investors’ money have incurred transaction costs exceeding their headline charge.

Funds tracking the British stock market racked up the highest hidden costs, which are not included in headline fees but are ultimately paid by investors.

https://www.telegraph.co.uk/investing/f ... dline-fee/

monabri
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Re: Trackers' fees often higher than those advertised

#414549

Postby monabri » May 24th, 2021, 11:04 am

The tracker fund has to buy and sell to track the market, this involves costs. The managed fund has the option of just "sitting there" or maybe a little bit of portfolio tweaking. If the market is volatile (driven by Covid19 concerns) there are additional transactions to track the market.

GeoffF100
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Re: Trackers' fees often higher than those advertised

#414562

Postby GeoffF100 » May 24th, 2021, 11:38 am

monabri wrote:The tracker fund has to buy and sell to track the market, this involves costs. The managed fund has the option of just "sitting there" or maybe a little bit of portfolio tweaking. If the market is volatile (driven by Covid19 concerns) there are additional transactions to track the market.

Market weighted trackers do not have to buy and sell to track the market, except when companies enter or leave the index or as a result of corporate actions (e.g. rights issues). In an open ended fund, these transactions can often be carried out at no cost as a result of units being bought and sold. Vanguard investors also receive the whole proceeds of stock lending. Managed funds invariably have much higher turnovers (within the fund) than market weighted trackers. (N.B. We need to distinguish between turnover as a result of buying and selling units and turnover within the fund.) Vanguard has said that the published transaction costs (including theirs) do not reflect the true costs. If you look at the tracking error for Vanguard market weighted trackers, they do not significantly under-perform the index by more than the Annual Management Charge.

NotSure
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Re: Trackers' fees often higher than those advertised

#414591

Postby NotSure » May 24th, 2021, 12:46 pm

Vanguard, for example, do publish the details of the additional fees. They can vary quite a lot between funds, with active bond funds having the highest.

For their world tracker, they are pretty low: 0.03% transaction costs, and 0.04% 'one-off' costs, in addition to the 0.22% OCF.

https://www.vanguardinvestor.co.uk/content/documents/legal/vanguard-full-fund-costs-and-charges.pdf

GeoffF100
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Re: Trackers' fees often higher than those advertised

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Postby GeoffF100 » May 24th, 2021, 2:14 pm

NotSure wrote:Vanguard, for example, do publish the details of the additional fees. They can vary quite a lot between funds, with active bond funds having the highest.

For their world tracker, they are pretty low: 0.03% transaction costs, and 0.04% 'one-off' costs, in addition to the 0.22% OCF.

https://www.vanguardinvestor.co.uk/content/documents/legal/vanguard-full-fund-costs-and-charges.pdf

First, the regulators have allowed fund providers to use several different methods to calculate their funds' transaction costs. Different providers are likely to use varying calculations, making comparisons between providers meaningless.

https://www.vanguardinvestor.co.uk/arti ... nd-charges

In other words, the transaction costs quoted are not worth the paper that they written on. As I have said, they are not a significant performance drag for Vanguard market weighted trackers.

GeoffF100
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Re: Trackers' fees often higher than those advertised

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Postby GeoffF100 » May 24th, 2021, 6:18 pm

Vanguard's quoted transaction costs are to be found here:

https://www.vanguardinvestor.co.uk/cont ... harges.pdf

As I have said, they are to be taken with a pinch of salt, and cannot meaningfully be compared with those from other fund managers. It is worth noting that the transaction costs quoted for some funds are negative. That clearly is not realistic. Vanguard has said that they are using the formula recommended by the regulator. Nonetheless, the table does contain some useful information. The FTSE All Share is a little cheaper than the FTSE 100, which incurs higher costs when companies enter and leave the index. The hedged global bond funds are more expensive than the gilt funds. The average spreads are given for the ETFs.

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Re: Trackers' fees often higher than those advertised

#414714

Postby Alaric » May 24th, 2021, 6:31 pm

GeoffF100 wrote: It is worth noting that the transaction costs quoted for some funds are negative. That clearly is not realistic.


A probable explanation is profits from stock lending. In other words, facilitating the practice of "shorting".

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Re: Trackers' fees often higher than those advertised

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Postby GeoffF100 » May 24th, 2021, 6:48 pm

Alaric wrote:
GeoffF100 wrote: It is worth noting that the transaction costs quoted for some funds are negative. That clearly is not realistic.

A probable explanation is profits from stock lending. In other words, facilitating the practice of "shorting".

Stock lending is not a transaction cost, but Vanguard does lend stock. The negative transaction costs occur for the Vanguard Active U.K. Equity Fund, and no other funds. The tracking error is often less than would be expected from the costs. Indeed, Vanguard trackers sometimes outperform the index. If I remember correctly, Vanguard said that the negative transaction costs occurred because the transaction cost calculation was not realistic.

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Re: Trackers' fees often higher than those advertised

#414756

Postby NotSure » May 24th, 2021, 8:28 pm

Even taking Vanguard's quoted transaction fees at face value is interesting - really highlights the difference between passive and active - active have far higher 'hidden' costs in addition the elevated OCF.

Vanguard sends a monthly email, which is often worth a quick read IMO. I'll try to dig out the link, but as often quoted, on average, active funds slightly underperfom passive trackers. What was interesting to me was that the average net performance of active funds actually outperformed the market - it was purely the fees that turned this outperformance to underperformance. Particularly disappointing to me regarding the active funds, at times of 'market stress' when you might hope an active manager might cushion the blow a bit, the underperformance of active funds was often at its worst. All statements 'on average' of course - many here have done well from managers who perform above average.

I think the great performance of US tech mega-caps has made life hard for active managers. Whether this will continue, or whether active becomes more use should this change, of course remains to be seen. having said that, passive small caps funds, for example, have had very large gains post-Covid crunch. I personally do intend to hold some active funds going forward (I already have a modest proportion of such in my company pension), but I'll definitely have a good selection of trackers so I can be sure how well (or badly) they are really doing. And I'll be looking very carefully at the 'hidden costs' not included in the OCF......

Edit: article with plot of active net/inc costs: https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-success/how-to-build-a-portfolio-part-four

GeoffF100
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Re: Trackers' fees often higher than those advertised

#414760

Postby GeoffF100 » May 24th, 2021, 8:41 pm

NotSure wrote:What was interesting to me was that the average net performance of active funds actually outperformed the market - it was purely the fees that turned this outperformance to underperformance. Particularly disappointing to me regarding the active funds, at times of 'market stress' when you might hope an active manager might cushion the blow a bit, the underperformance of active funds was often at its worst.

If the average manged fund out performed the index before costs, other investors must have underperformed before costs. Who were they? Certainly not the trackers. Active fund managers very rarely sell before a crash. There have been studies on this.

NotSure wrote:I think the great performance of US tech mega-caps has made life hard for active managers.

They are paid handsomely to predict these things, but they cannot do it.

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Re: Trackers' fees often higher than those advertised

#414838

Postby 1nvest » May 25th, 2021, 12:15 am

Alaric wrote:
GeoffF100 wrote: It is worth noting that the transaction costs quoted for some funds are negative. That clearly is not realistic.

A probable explanation is profits from stock lending. In other words, facilitating the practice of "shorting".

Perhaps "internal" lending. Vanguard UK might receive a dividend more tax efficiently than Vanguard US, so Vanguard US 'lends' the stock to Vanguard UK for a day just before X-div in return for payment equal to the received dividend less a bit. Where both sides have a positive benefit from that transaction, recorded by both as being a negative transaction cost.

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Re: Trackers' fees often higher than those advertised

#414840

Postby 1nvest » May 25th, 2021, 12:27 am

Look at Vanguards tracker funds for instance and for some they benchmark to the N suffix index ... which reflects "Net" of 30% US dividend withholding tax. In only actually paying 15% dividend withholding tax then there's a 15% of dividend relative outperformance there alone compared to the benchmark. 2% dividend, 0.3% outperformance compared to the net total return index, deduct 0.1% fund management fees from the dividend and still outperforming the index by 0.2%. Vanguard tends to pass that on so you can see a relative outperformance. Others don't, and may also be pocketing a proportion of the benefits from stock lending.

In the past I've seen some funds that charge 0% fees, and they most certainly aren't a charity. Rather they make their profits through a range of slight-of-hand methods.


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