Welcome to the new morningstar.co.uk! Learn more about the changes and how our new features help your investing success.

Why are Some ETFs Cheaper than Others?

The fees on ETFs tracking the same markets vary significantly - we look at how it can affect your returns

Annalisa Esposito 13 August, 2019 | 12:40AM

fees

Time-poor investors have increasingly turned to passive funds as they don’t have the time to cherry-pick stocks themselves and don’t want to pay high fees for active funds. It is no wonder then, that the exchange-traded fund (ETF) industry has flourished as a result.

According to Morningstar research, the amount held in European-domiciled ETFs has more than doubled over the past five years, with ETFs accounting for 8.6% of total assets under management as of March 2019.

ETFs are not new products – the first tracker listed on the London Stock Exchange back in 2000 – but they have matured over the subsequent two decades. Competition has increased and prices have fallen as a strong demand for these tracker funds has sparked a proliferation of new products.

Nowadays, price is one of the first things investors look at before investing their money. That’s unsurprising, given the huge impact that fees can have on total returns, especially when high charges compound over the years.

Research by Vanguard has found that a £100 investment into a fund with fees of 0.25% would be eroded to £96.31 after 25 years, assuming no growth. The same investment in a fund charging 1% would be worth just £86.01 after that time.

ETFs That Track the FTSE 100 

But analysis shows that price is not the only factor to consider when investing in ETFs. According to Morningstar Direct data, there are ten ETFs, from eight distributors, that track the FTSE 100 in a plain, vanilla way.

ETF Distributors by Fees

ETF fees

The fees on these range from 0.07%, charged by HSBC and BlackRock, up to 0.24% charged by Amundi. On a £1,000 investment these fees equate to 70p and £2.40 a year – while they are both small amounts, the Amundi fund costs more than three times as much, which will eat into returns over time. 

While it is often the case with investment funds that older products are more expensive, the BlackRock iShares FTSE 100 tracker is actually the oldest on the list, having launched in 2000. The UBS fund, which charges 0.2%, launched in 2001.

But different asset managers have different cost structures. Mark Fitzgerald, head of ETF product management at Vanguard, says charges often depend on licenses and agreements for the price of the index, as well as factors such as administrator or custody costs.

Other aspects which affect fees include how large a fund is, how well-resourced the management group is and whether the ETF uses physical or synthetic replication when it is tracking the index. Our recent ETF Due Diligence series took an in-depth look at the set-up at some of the major ETF providers including Amundi, Vanguard and UBS.

Given how charges eat into returns it is, perhaps, unsurprising to see that the cheapest products have produced the greatest returns over a three-year period. 

FTSE 100 ETFs

iShares has produced the best return across the group, up 6.3% over three years. As well as being among the cheapest and best-performing funds, it also has a hefty £6.9 billion of assets under management.

The impact of higher charges is evident in UBS fund’s performance – it has returned 5.2% over three years and 5.7% over five years.  Over a one-year period, however, the UBS tracker is the strongest of the group, down 1.5% over the period.

But “you don’t want to rely solely on the price of an ETF,” Fitzgerald warns. Instead, investors should also take into account other factors, such as the spread, how expensive it is to trade, tracking error (that is, how closely it follows its chosen index) and, above all, the performance over the long-term.

Adam Laird, head of ETF Strategy at Lyxor, agrees that charges should not be the only thing to take into consideration when taking a decision. He believes it is better to have a look at the bigger picture. “Don’t buy an investment that is inappropriate to your portfolio just because it’s cheap”, he advises.

ETFs Tracking the S&P 500

According to Morningstar Direct data, there are nine distributors with funds that track the US stock market, the S&P 500. Here, Invesco offers the cheapest option, with fees of just 0.05%. BlackRock and Vanguard are also at the cheaper end of the spectrum, with charges of 0.07%. On a £1,000 investment, these fees equate to 50p and 70p a year – less than a third of the UBS’s 0.22% charge.

ETF charges

Again, it seems that costs have a direct relationship with performance. As the US stock market has soared, the iShares and Vanguard trackers have returned 15.1% and 14.6% respectively over the past three years. The two funds, which each have a Gold rating from Morningstar analysts, top the performance table over one and five-year periods too. 

Morningstar analyst Helaine Kang says that because the two funds have a low ongoing charge and a soundly constructed benchmark, they are “well-positioned to continue their long streak of producing superior risk-adjusted returns”.

At the other end of the spectrum, DWS Investment’s X-trackers is the worst performer, returning 5% less than iShares over the last three years; it has also reached its lowest performance (a sad 1.6%) since its launch in 2015 over the last 12 months.

S&P table

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites