ETF transaction costs up to five times OCF – Fitz research

ETF fund transaction fees can be five times the quoted Ongoing Charge Figure (OCF), with the average equity fund spending an extra 21 per cent beyond the OCF on transaction costs, according to new research from Fitz Partners.

Figures from the research provider show that the Vanguard FTSE 250 ETF has an OCF of 0.1 per cent but comes with transaction charges of 0.5 per cent. The UBS MSCI UK IMI Socially Responsible ETF was shown to have an ongoing charge of 0.28 per cent, but carries trading costs of 0.74 per cent. Fitz says the research shows how the relative size of trading fees compared to OCFs can in some instances can bring ETFs overall costs over those of some active funds. The research also highlights the fact that a quoted OCF on its own is not a full reflection of fund costs, and trading costs can challenge the perception of some fund products being always better value.

Fitz Partners calculated transaction fees from audited fund accounts and measured the impact they would have on funds’ OCFs, should both costs be aggregated in one single measure. The relative increase in OCF due to the addition of transaction or trading fees depends on asset class or product types. OCFs would increase on average by 21 per cent for equity funds, 29 per cent for index trackers and 26 per cent for ETFs.

Fitz Partners CEO Hugues Gillibert says: “Adding 20bps of trading fees to an OCF of 100bps is not really welcome, but certainly not as impactful as adding the same 20bps to a lower OCF of say 25bps. In the last few years, most funds including ETFs have been lowering their OCFs quoted to investors. With the implementation of MiFID II, trading costs will become more transparent and allow investors to refine their investment choice.

“The industry will benefit from further transparency on trading costs and it would be best disclosed at the point of investment alongside the fund’s OCF and subscription charges as well as platform fees. Equity funds remain the asset class with the highest average trading fees at 20bps, a level still below most platform fees.

“Our research shows that whatever the product, managing money requires transactions and attracts costs. The growth in smart beta ETFs is one of the reasons for the overall increase in trading costs for ETFs. Remarkably, index tracker funds remain on average better value after trading costs, when comparing with ETFs.”

Vanguard head of ETF capital markets Tom Bartolacci says: “We haven’t seen the methodology used by Fitz Partners in this research. But we say investors need to make sure they understand the dynamics of the market and the spreads that are there in the products they are buying. Due diligence is needed to understand the performance of the manager relative to the index.”