Exchange traded funds, indexes and fees
Words like, exchange traded funds (ETFs), TIC and indexes shouldn’t make you freak out emotionally.
These are actually simple ideas.
Let’s jump in first with a one-paragraph explanation. ETFs are exchange (such as the Johannesburg Stock Exchange), traded (they can be traded on the JSE) funds (like a giant stokvel). Many of these track an index. An index is a set of rules that a stock needs to adhere to such as “you need to be one of the 500 biggest companies” or “you need to have shown a profit for 10 years in a row”. For more info on ETFs, check out my article here!
These indexes (rules) are sold by big companies to financial firms. Examples of indexes are the S&P500 and the MSCI World indexes.
So what's the difference?
Quite a few companies in South Africa can have a fund that tracks the same index. Below, you might see that Satrix and Sygnia track the same index.
You might ask – well, what’s the difference?
Truthfully, not much. They follow the same rules, the invest in the same stocks/bonds/things.
The only difference we can spot would be fees.
Fees: what is TIC and TER?
Let’s talk fees.
Trading costs money. Fund managers cost money.
Investing costs money.
Yet, if everyone is selling the same product, it would make sense that there are fierce competition in the sphere of pricing. ETFs is no exception.
Funds, in general, have many fees – some small and some big. It’s been quite a challenge to get proper breakdowns historically. It’s been made quite a bit easier with legal clauses and the minimum disclosure documents, yet, even in my personal research, I have often found these to be out of date or downright inaccurate (Check my article where I found an RA provider not being truthful on their fund fact sheets here).
Essentially, TER, or total expense ratio is the total expenses that will be payable for the fund. This should include things like auditing fees, profit and legal requirements.
The issue was that often TER did not include the transaction costs. This is where TIC was born – a simple way to calculate EVERYTHING.
It’s oftentimes a bit difficult to be able to narrow down the fee amounts for the simple reason that they could change from year to year. For example, if the S&P500 reindexed (the rules are applied again, and some stocks are bought or sold), it could mean that the transaction costs could be a lot more than initially thought.
It’s worth noting that many fund fact sheets only display TER.
Please ask your provider for the platform charges and advisor fees, as these are often quite intense!
Let’s add a bit of complexity here, just for stupid people like me.
Some funds are feeder funds.
It’s a fund, but it feeds all its money into another fund.
It’s important to note that if you’re investing in a fund that is investing in another fund, you would have TER and TIC on both of those. Make sure from your financial adviser how the fees are broken down and what the fees you will pay are.
The S&P 500 index is very old – almost as old as Lord of the Rings! It was created in 1926 to track the top 500 companies listed in the US.
The 500 companies’ share in the index is tracked per capital amount. this means large companies will have a bigger stake in the pie.
For interest sake, the index value is updated (reindexed) every 15 seconds (1,559 times per trading day).
The S&P 500 company breakdown by stake size
Though the index is compiled by a committee, the following are the eight primary criteria: market capitalization, liquidity, domicile, public float, sector classification, financial viability, and length of time publicly traded and stock exchange.
Providers are financial companies that provide the fund to people. For my comparison, I have chosen these 4. They are all available on EasyEquities and you can go directly through them but might need to pay platform fees if you do decide to do so.
- Sygnia ITRIX S&P 500 (SYG500)
- Satrix S&P 500 Feeder ETF (STX500)
- 1nvest S&P500 Index Feeder ETF – Previously STANLIB S&P500 Index Feeder ETF (ETF500)
- CoreShares S&P500 ETF (CSP500)
Fund / Fund provider
Satrix S&P 500 Feeder ETF (STX500)
0.25% (incl. VAT)
1nvest S&P500 Index Feeder ETF – Previously STANLIB S&P500 Index Feeder ETF (ETF500)
CoreShares S&P500 ETF (CSP500)
MSCI World Index
The MSCI World index tracks a serious number of companies worldwide in their index. It’s invested internationally in developed economies such as the US, Portugal and Australia. It has securities in 23 nations.
It’s difficult to get more information on how this index is calculated, yet some of the information out there include the size, liquidity and geographical location.
The index is updated daily. It is also reviewed quarterly and rebalanced twice a year.
Fund / Fund provider
1nvest MSCI World Index Feeder ETF (ETFWLD)
Satrix MSCI World ETF (STXWDM)
SYGNIA ITRIX MSCI WORLD
Conclusion: The winners
If you’re solely looking at the fees for each EFT, it makes sense that the Sygnia ITRIX S&P 500 is cool, because of the low fees of 0.16%.
If you like the MSCI World index, then the Satrix MSCI World ETF is awesome at a mere 0.35% TIC.
I want to add disclaimers here – I am not giving you advice here. I am merely comparing the fees of two of the biggest indexes that the personal finances community loves dearly,
Now, go do your own research.
Frugal Local runs his own company (Effectify). He does software development and helps small businesses and startups with digital solutions. He enjoys writing articles and simplifying complex things – such as the article you’re reading!