Ahead of incoming Mifid II regulation, independent research firm Fitz Partners took audited fund accounts and measured the impact of transaction fees on funds’ OCFs, if the OCF and transaction fee were aggregated in one single measure.
It found the relative size of transaction fees compared to the OCF is “significant” for some cheaper tracker funds and exchange traded funds (ETFs) compared with some active equity products.
The research revealed when the average OCF and trading fee are added together, OCFs increase on average by 21% for an equity fund, but 29% for index trackers and 26% for ETFs.
It found in some instances the relative size of transaction fees was as much as five times the disclosed annual charges which, Fitz noted, can bring ETFs’ overall costs above those of some active funds.
The research found, for example, Vanguard’s FTSE 250 ETF OCF listed as 0.10% whereas the trading cost is 0.51%. Elsewhere, the UBS MSCI UK IMI Socially Responsible ETF has an OCF of 0.28% against a trading cost of 0.74%.
Fitz Partners said the findings show that a quoted OCF on its own is not a full reflection of fund costs and factoring-in trading costs can challenge the perception of some funds offering better value.
Hugues Gillibert, chief executive of Fitz Partners (pictured), told PA: “We are in a situation where a lot of people think ETFs are cheap; you pay your fees and everything is fine. For the vast majority of ETFs this is true, but what we found was that [on a relative basis] transaction fees can be expensive compared to the bottom line costs.”
He explained: “If there is a 25bps transaction fee and you are already paying 75bps on an equity fund, you might not be that happy but your fund is active and if it goes above 1% that is not so bad. But, if you are paying 25bps all in expenses for ETFs then you realise a transaction fee is actually doubling that figure.
“It is like buying a cheap plane ticket and the cost of extra luggage is £50 and you are doubling the air fare, whereas if you go on an expensive flight then £50 might not be much compared to the £200 for the flight. It is because it is relative and I think some investors might be surprised.”
Gillibert added that the industry will benefit from further transparency on trading costs and this is best disclosed at the point of investment, alongside the fund’s OCF and subscription charges, and platform fees.
