By Jordan Eliseo, Manager – Listed Products and Investment Research, The Perth Mint
The Exchange Traded Fund (ETF) market continues to prosper in Australia. Amid a sharp rally in risk assets, there were more than AUD 20 billion in inflows during the last financial year. At the end of October 2021, assets under management topped AUD 125 billion, a rise of more than 70% in 12 months.
With more than 200 products for direct investors, advisers and institutions to pick from, the local ETF market looks set for years of continued growth, especially given the penetration of ETFs in Australia still lags markets like the United States.
The range of ETF fees is wide
In the early days of the ETF market, the term ETF almost exclusively meant low-cost passive investment products designed to track a specific stock market or asset class. Some of these products are available to investors for management fees (MERs) of less than 0.20% per annum.
In the past few years, there has been a notable rise in thematic ETFs, as well as the launch of actively managed funds in ETF form, the latter of which still rely on the skillset of portfolio managers, and charge accordingly.
This has contributed to a now wide gap between the most expensive and least expensive ETFs, based on MERs and spreads. As the table below highlights, average MERs (unweighted) across all ETFs currently sit at 0.53%,with a more than 2% gap between the highest and lowest cost.
What are investors actually paying?
Investors in the ETF market are currently paying a weighted MER of 0.45% as at October 2021 (lower than the unweighted average of 0.53%), with a larger share of ETF investments sitting in lower cost products.
This weighted MER fee across the entire industry has increased by 35% since 2017, evidenced through the table below showing weighted MERs, the size of the ETF market, and the implied dollar charges across the industry as a whole.
Where does each asset class sit from a cost perspective?
The graph below highlights the cost of each asset class, relative to the average cost of all ETFs. [Please note I have used Perth Mint Gold (ASX:PMGOLD) to represent the precious metal as an asset class.]
In essence, if the gold or black bars on the chart are to the left of the zero line, then that asset class has lower MERs and/or spreads compared to the ETF market as a whole. To the right, these costs are higher.
The chart makes it clear that with the exception of gold, most alternative assets, from commodities, to infrastructure and currencies, are at the more expensive end of the ETF market, as are global equity strategies concentrated in Asia or emerging markets.
These cost divergences are one factor for investors and advisers to consider as they allocate capital moving forward, especially given the uncertain investment environment as we head into 2022.
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