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Monday, 10 July 2017

What To Do About The New?

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Hot off the press! 
The last month has been an exciting time for South African investors. The industry received a bit of a shake up with the news that 3 new international ETF's would be launched by Satrix, followed by the news that Easy Equities would be trialling a new offering which would allow investors to buy US listed instruments. And while it may seem that these two developments are not at all related, on closer inspection, I found that they are quite complementary.

So what to do about all of this? Definitely some investment food for thought...

New Satrix International ETFs

First up the new Satrix ETF's. Three of them will be launched:
  • Satrix MSCI World Feeder Portfolio (fact sheet here, more info here)
  • Satrix S&P 500 Feeder Portfolio (fact sheet here, more info here)
  • Satrix MSCI Emerging Markets Feeder Portfolio (fact sheet here, more info here)
Satrix have been quite aggressive with the pricing - the TER's they are targeting for each is as follows (with existing directly comparable products and their TER's shown alongside, to illustrate the relatively low cost Satrix offering):

ProductTERComparable Product
Satrix MSCI World Feeder Portfolio0.35%DBX Worldwide ETF (TER 0.68%)
Satrix S&P 500 Feeder Portfolio0.25%Coreshares S&P 500 (TER 0.45%)
Satrix MSCI Emerging Markets Feeder Portfolio0.40%N/A

The new Satrix products have come in nicely below the competition - great for us investors!

I was particularly interested in the Satrix MSCI World Feeder Fund as an alternative for my current DBX Worldwide ETF holdings. The World Feeder Fund, with a TER of 0.35%, is around half the cost of the DBX Worldwide ETF. It had me very interested, and so I had a look under the hood. But before I go there, a quick side note.

Out of interest, Sygnia, who recently acquired the DBX Tracker Products (including the DBX Worldwide), recently sent out an update on the re-branding of the DBX products (now called iTrix) and some information on the costs going forward. They cut the DBX ETF fees by 0.1% - which on the surface sounds great, until you realise that you only get that saving if you are on Sygnia's platform (which coincidentally charges a 0.1% fee, if you have over R2 Million. Less than R2 Million and that fee is 0.2%, so you will actually be worse off!) So no real benefit, unless you were already on the Sygnia platform. Also, if this is their best response to the new Satrix products, then I am not hopeful that Sygnia will be competitive in the Worldwide ETF space for at least the next few years.

Anyways, back to the Satrix offerings...

Interestingly, all the new Satrix ETF's are actually just a proxy for an equivalent Blackrock iShares ETF investment.

Surprisingly not made by Apple

In the case of the Satrix MSCI World Feeder Portfolio ETF, Satrix simply takes your investment and plonks it into the iShares Core MSCI World UCITS ETF. (This is where the feeder in the Satrix name comes from - Satrix simply feeds your money to the hungry iShares ETF monster.)

So my immediate thought was  - well now we going to pay the Satrix TER, as well as the iShares TER (which is 0.2% according to their factsheet) and so the Satrix ETF's are actually not as cheap as they appear. To confirm my suspicions I took a look at the Satrix MSCI World Feeder Portfolio pre-listing docs (don't recommend reading these unless its right before bedtime) and found the following:

"The manager is entitled to a service fee per accounting period equivalent to:
    ▪ 15 basis points (or 0.15%) of the market value of the total assets of the portfolio... "

And low and behold - I was wrong. It seems Satrix are taking a fee of 0.15%, and the remaining 0.2% of their 0.35% targeted TER is from the underlying iShares Product. (I suspect the same holds true for the other two Satrix products...)

So very nice - it seems they are as cheap as they claim!

But.....

It still wouldn't be as cheap as buying the iShares ETF directly of course (TER of only 0.2%). And better still - imagine if we could invest in the Vanguard Total World Stock ETF which tracks the exact same index, but with a TER of only 0.11%!

And this brings me to the other new product which will be available very shortly...

Easy Equities USA Offering

Stars, stripes, and low cost ETF's
Easy Equities are close to going live with their US offering (currently pencilled in for the first week of August 2017). Once this happens, anyone with a normal Easy Equities account will also be able to buy a selection of instruments which are listed in the United States. Very Cool.

And guess which products Easy Equities will make available to us?

Yes that's right - some of the very same iShares ETF's that the new Satrix Feeder ETF's hold (the iShares Core S&P 500 ETF and the iShares Core MSCI Emerging Markets ETF).

By using the Easy Equities platform, you can go direct and invest in the exact same underlying ETF's that some of the Satrix Feeder Funds are investing in - except it will cost you 0.15% less per annum. Sneaky!

Unfortunately, at the moment, it seems that there will be no iShares Core MSCI World UCITS ETF on the Easy Equities platform. Fortunately, Easy Equities are open to requests from the public for ETF's and shares to be added to their offering - so I was thinking of requesting them to add the iShares Worldwide product. But then I figured why settle for a 0.20% TER, when I can get a 0.11% with the Vanguard Total World Stock ETF.

So I went on a bit of a Twitter campaign to get Easy Equities to add the Vanguard product to their platform (if you haven't already, please retweet - it seems Easy Equities are working on a system of the more popular a request, the more likely it will get added)


If Easy Equities do end up adding the Vanguard Total World Stock ETF, then you can achieve even better results than the Satrix MSCI World Feeder Portfolio ETF! (Your returns should, in theory, be 0.35% - 0.11% = 0.24% better per annum than the Satrix ETF). Private investor score!

Distributions Automatically Reinvested

Just something else to realise about the iShares products - the distributions are not paid out (and that's whether you go direct or through the Satrix product).

Now this may be a good or a bad thing for you, depending on what you intended to do with the distributions:
  • If you wanted to use the distributions for something else (e.g. draw them out for income, use them to buy other ETF's, or use them to cover your brokerage/admin costs of your account) then you may not like it.
  • If you were planning to just reinvest the distributions in the same product, then this is great - because now it gets done automatically for you (and without the brokerage charges you would usually pay). 

TFSA vs Normal Account

So all this finally brings me to what I plan on doing in order to take advantage of these new products (as always this is not investment advice blah blah blah...)

TFSA

Unfortunately the iShares/Vanguard products won't be available in Easy Equities TFSA accounts (only locally listed ETF's allowed). However the new Satrix ETF products are TFSA approved and available.

So I am going to sell out of my DBX Worldwide ETF's and subscribe to the Initial Public Offering of the Satrix MSCI World Feeder Portfolio. By subscribing to the IPO, I will save on brokerage on the buy side (I will still have to pay brokerage on the sale of the DBXWDs though). Also, no Capital Gains Tax in a TFSA (not that it would matter - still well below the R40k exclusion).

For me, moving into the new Satrix product is a no brainer - I am getting the exact same product at a cheaper TER. Yes there will be costs involved in switching out (brokerage 0.2%, and a quick look at the spread at the time of writing indicates around 0.4% on the sell side - so a total switching cost of around 0.6% if I get in on the IPO).

But since I am in this for the long haul, the cost of switching will easily be made up by the significantly lower TER. A rough estimate of 0.33% p.a. TER saving means, in less than 2 years, this switch will start paying dividends (pun intended). There is also the added bonus of even more cost savings (albeit minor) by having the dividends re-invested automatically.

And then, going forward, it makes sense that the money I was previously allocating to DBX Worldwide, I will now be allocating to the Satrix MSCI World Feeder Portfolio instead.

Normal Brokerage Account

In my normal Easy Equities brokerage accounts I am waiting to see if the Vanguard products get added to the Easy Equities platform. If/when that happens I will sell out of the DBX Worldwide positions, and buy into the Vanguard ETF's. Then, going forward, any money which would have been used to buy DBX Worldwide, will now buy the Vanguard Total World Stock ETF instead.

The Vanguard product (0.11% TER) is way way cheaper than DBX Worldwide (TER 0.68%), and 0.24% cheaper than the new Satrix ETF offering (TER 0.35%).

Just keep in mind, that if you decide to do the same and sell out of your DBXWDs, and it is not in a Tax Free product, you may have some Capital Gains Tax implications. One approach could be to sell enough this Tax year to fall below the R40k exclusion rate, and then do the rest in subsequent years. Or at least calculate the Tax cost and see how many years it would take for the TER saving to offset this, and then decide if it is still worth it for you. I am fortunate because any sale I make would be below the exclusion rate, and no CGT will be payable.

Important - There is another important aspect to remember for a US based investment such as the Vanguard Total World Stock ETF versus the iShares Core MSCI World UCITS ETF which is based in Ireland (uh-oh here comes the T-word again). If you die with more than $60k worth of investments in a US based product, and you want to transfer that investment to your spouse, then you will be subject to US Estate Duty Tax of 40%. That is a really high Tax rate - Ouch! However, for me, this is not an issue as it is going to take a really long time (if ever) for both my wife and I to hit $60k worth. But this is definitely something for people with a larger investment pot to keep in mind. If you do meet the $60k criteria, then could we please be friends you may want to consider the Irish based iShares Core MSCI World UCITS ETF (or another non-US domiciled product) instead.

And then one last aspect to the Easy Equities US offering - I played around a little with the Demo Account, and it seems that buying costs will be around 0.75%. So a little steep compared to their local offering, but since this is once off per transaction, it is still well worth it in the long run because it allows access to Vanguard (and other international ETFs) at a fraction of the costs of the South African based ETFs.

Things are really starting to get interesting for South African investors - what a time to be alive!



Till next time, Stay Stealthy!
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