Costs of investing in Exchange-Traded Funds

Investment Cost ETF's

NAV TL;DR

If you don’t have time to read through the whole article, you can check out a summary below:

  • Most fees associated with investing in equities are similar to ETFs
  • But investors of ETFs also incur management, trustee and custodian fees, which are deducted from a fund’s net asset value at the end of a year
  • The combination of these fees forms the Expense Ratio -- expressed as a percentage -- and their amounts depend on the ETF

The cost of investing is an important factor that all retail investors should consider when investing. Some of these costs can take several forms and may vary when investing in different financial instruments such as equities, Exchange-Traded Funds (ETFs) and unit trusts. It is prudent to do your due diligence and weigh all the charges incurred when making investments. Remember that the lower the cost, the higher the returns.

Similar to equities, there are costs associated with investing savings through ETFs.

Common fees between investing in equities and ETFs

ETFs are passively managed funds which are viewed as a low-cost option providing individuals with the opportunity to invest in a basket of companies according to their risk profiles without having to purchase individual stocks.

In the case of ETFs purchased through Singapore-based brokers, the same front-end and back-end costs for shares and Real Estate Investment Trusts (REITs) apply, along with some additional fees.

Assuming an investor wants to purchase 10,000 units of ETF X at $2.615, the front-load costs similar to purchasing equities are listed below:

ETF X

Total contract value

$26,150.00

Commission fee

$73.22

Clearing fee (0.0325%)

$8.50

Trading fee (0.0075%)

$1.96

Total fees

$83.68

GST (7%)*

$5.86

Indicative total proceed

$26,239.54

*GST is charged on fees only

When making an investment worth $26,150, the investor will have to incur an additional $239.54 in the form of commission, clearing, and trading fees along with the prevailing goods and services tax.

Expense Ratios

On top of those fees and GST, investors also face annual fees when purchasing ETFs. Often times, investors do not take notice of these management, trustee and custodian fees even though they are listed in fund prospectuses and documents.

The combination of these fees — called an expense ratio — is expressed as a percentage. Think of it as an operating expense for running the fund. In 2019, ETFs across the globe had an average expense ratio of 0.44% per annum (pa). This means that for every $1,000 invested in an ETF, unitholders will incur an annual fee of $4.40.

The expense ratios of Singapore-focused ETFs vary. For instance, the SPDR STI ETF and Nikko STI ETF each have an expense ratio of 0.3% pa. Meanwhile, the ABF Singapore Bond Index Fund, which tracks Singapore government bonds has an expense ratio of 0.25% pa while the Lion-Phillip S-REIT ETF is a little more costly at 0.6% pa.

These expenses are usually deducted from a fund’s net asset value at the end of each year. It is important to note that fees are not deducted from the amount the individual invested.

Rounding back to the example of an investor purchasing 10,000 shares in ETF X for a total contract value of $26,150.00, what are the estimated returns over a 5-year period if the fund has an expense ratio of 0.3% or 0.5%?

Year

Gain

Expense ratio

 

5%

0.3%

0.5%

0

$ 26,150.00

$ 26,150.00

$ 26,150.00

1

$ 27,457.50

$ 27,379.05

$ 27,326.75

2

$ 28,830.38

$ 28,665.87

$ 28,556.45

3

$ 30,271.89

$ 30,013.16

$ 29,841.49

4

$ 31,785.49

$ 31,423.78

$ 31,184.36

5

$ 33,374.76

$ 32,900.70

$ 32,587.66

$ loss

 

-$ 474.07

-$ 787.11

% loss

 

-1.44%

-2.36%

Assuming ETF X has an annual return of 5% and is an expense-free fund, the investor’s initial investment would be worth $33,374.76 after 5 years. If the expense ratio of ETF X is 0.3%, the returns from the investment would be 1.4% lower than if it was expense-free.

Now, consider the expense ratio of ETF X as 0.5%. This will lead to a 2.4% decrease in return, thus, showing how a slight difference in expense ratios can affect returns over a period.

Making ETF investments using CPF balances

Investors are also able to purchase select ETFs through their CPF Ordinary Account (OA) and Special Account. To invest your CPF OA in shares, open a CPF Investment Account with an approved CPF Investment Scheme (CPFIS) agent like DBS.

On top of the brokerage commission, clearing, trading, management fees as well as GST, investors will have to bear addition fees. This includes a CDP settlement fee of 35 cents per transaction, which the CPFIS agent will collect on behalf of CDP.

Further upfront costs include agents charging up to $2.50 per 1,000 shares or units, with maximum charge of $25 per transaction.

Recurring costs include a $2 fee per ETF holding per quarter, with a minimum charge of up to $5.

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