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Wednesday 25 April 2018

Flipping Property

Low TER you win, high spread you
My preferred ETF for local equity exposure is the CoreShares Equally Weighted 40. But something that has been bugging me for a while, and which I saw again during my latest round of monthly buying, is that the spread on this ETF is pretty high – especially compared to similar(ish) ETF’s like the Satrix 40.

(For more information on spreads, there is a great write up here )

It seems that the CoreShares Equally Weighted 40 market maker consistently has a spread of over 1.6%. By comparison, the Satrix 40 market maker has a spread of around 0.4% - that is 4 times less1!

So I queried CoreShares about it2.

They were kind enough to respond, but their answer was more around the factors which influence the spread, and less around why a product holding the exact same underlying shares (albeit in different weightings), operating in the exact same market and experiencing the exact same factors could offer a spread that was so much less.

Of course I can appreciate reasons such as the Satrix 40 is a much larger fund, they have more negotiating power or whatever – but sheesh 1.6% versus 0.4%? It’s not even the same sport, never mind the same ballpark.

So I prompted them again for more info, but they never responded.

Unfortunately, I like the methodology and weightings of the Coreshares Equally Weighted product for local equity exposure, and I don’t see a suitable replacement product at the moment, and so there is not much I can do for now – except alert them to the fact that I think their spread is high. So let's park that one...

However, I also hold some other Coreshares products (Proptrax Ten and their Global Property ETF) and so I started scratching around those too. In the Global and Local Property space, there are some direct competitors to these.

I decided it might be a good time to re-evaluate my holdings and see if the competition can offer a better deal (in terms of spread and TER)

Global Property ETFs

In the Global Property ETF space, there are now three options you could consider (a year ago there was only one). The three are:
The Sygnia and Coreshares products track the exact same index (S&P Global Property 40 Index). The Stanlib one tracks a different index (FTSE EPRA/NAREIT Global REIT Index), but it is roughly the same idea.

I have summarised the three ETF’s with regards to spread and TER in the table below. TER’s were taken from the MDD’s of the providers. For the spreads, I went and checked live market depth of all the ETF’s at the exact same time, to ensure a fair comparison. I made a note of the market makers bid and offer prices - easily spotted by nice round volumes on each side of the bid and offer. I repeated this five times and then averaged the results out. I know this is certainly not conclusive, but good enough to get a fair idea.

So it turns out that the ETF I use for my Global Property allocation has the highest TER out of the three! And then to make matters worse I saw this in the latest Coreshares S&P Global Property MDD:

CoreShares has subsidised the TER whilst the portfolio was new and a higher TER will occur in the future.”

So it seems that, going forward, the TER will be moving in the wrong direction…

Then with regards to spread – first off Stanlib WTF!? Almost a 3% spread. I wouldn’t touch this one! Moving swiftly along…

The Sygnia option has a significantly lower spread than the CoreShares product. So lower TER and lower spread on the Sygnia product – this is now a no brainer! All future money I want to invest in offshore property will be going into the Sygnia Itrix Global Property ETF.

In fact I will stick my neck out and say there is absolutely no reason why anyone should be putting money into the CoreShares S&P Global Property ETF. You get the EXACT same thing at Sygnia, for less– which means your returns will be better.

So that takes care of any new money going in. As for my existing CoreShares S&P Global Property ETF holding, it is a little more complicated. Moving out of one fund and into another is expensive (a.k.a. crossing the spread on the sell side of the existing holding, paying brokerage and other costs for selling, paying brokerage and other costs on the buy side, and then crossing the spread again to buy the new product). This little exercise will cost in the region of 2% (estimated using current spreads and assuming a low cost broker like Easy Equities).

With my timeframe and the significant TER saving at Sygnia, I will be looking to move over - just not in a hurry. I will maybe wait until I see a narrower spread (maybe some other investors appear on the buy side) before selling out and flipping over to Sygnia.

Local Property ETFs

For my local property exposure, I prefer using an ETF which caps the weightings of the constituents. The reason for this is because the vanilla local property index trackers suffer from a similar problem as the vanilla Top 40 trackers – a lot of exposure to one company.

In the local property space, the giant in the room is Growthpoint – making up around 22% of the index.

There used to be only one player in the capped local property tracking space, but a Satrix option launched around a year ago. So now there are two:
The two are slightly different in the sense that the Proptrax Ten has 10 companies, and each one gets re-balanced to a 10% weighting in the fund every quarter. The Satrix option has 20 different companies, and caps the biggest ones at 10% - so the Satrix option is more diversified.

I then did a similar exercise with these two ETFs with regards to TERs and spreads. The results are as follows.

In terms of TER, again it seems I am no longer with the cheapest option. However the spreads complicate things a little, because unlike the Global Property scenario where there was a clear winner in both TER and spread, in this case the lower TER comes with a higher spread.

In terms of new money going in, it comes down to timeframes – because a lower ongoing TER will eventually make up the higher one off spread cost. Since I still have a long term view on this (as everyone who is investing in listed property should), all new money will be going into the Satrix product.

As for my existing Proptrax Ten holdings, I think I will be staying put for now. In an amazing case of irony, the very high CoreShares spread which kicked off this whole exercise is what will be keeping me in their product!

After estimating the spread and brokerage costs of moving - it will take close to a decade to recover the expense through the lower TER. In this time I have faith that, since there are only two options in the capped local property ETF space, more products will be launched over the coming years (and hopefully lower spreads too3!) If I move now and a better option comes along, then I will be tempted to move again - and that's going to be doubly costly! So I will leave things as they are for now….

In Conclusion

Going forward:
  1. All new money allocated to Global and Local property will be going to Sygnia and Satrix respectively.
  2. I will be looking to move my existing CoreShares Global Property ETF over to the Sygnia Global Property ETF should I see an opportune time to do so.
  3. I will be leaving my CoreShares Proptrax Ten holdings as is in the hope that there will be some new players in the space, at which time I will look to move over.
This was a really useful exercise, and it just shows you how the investment landscape is continually changing – and moving towards lower TER’s and better spreads. Long may it continue! I think it is also important that ETF selections are revisited from time to time - just to make sure we are still getting a good deal.

Till next time, Stay Stealthy!
 - ~ - ~

1 This was when I checked over the course of a few days around 2 weeks ago. I do realise that the spread could be narrowed by other investors putting bids and offers into the market, but there is no guarantee of this. That is why I consider the market maker spread as the measure of an ETF’s spread, since this is the worst case that someone using a broker which does not offer live pricing will get.
Interestingly, in the few days following my query to CoreShares about their high spread, I noticed the spread dropped to around 1%. As much I was would love to flatter myself and view it as my doing, it was probably just coincidence…
3 I have been hearing rumours that the JSE might start incentivising market makers, which could see third party market makers entering the arena. This should result in the spreads narrowing which will be great for investors!