We’re all told that we need to invest in financial products with a low service fee. But what exactly is a low fee? And how much does it actually matter?
There is no doubt that the financial experts agree that high fees inhibit your investment principal’s growth. And there is a naive school of mind that associates higher fees with better fund performance.
The higher fees charged by managed funds do not guarantee you higher returns when compared to passive funds. It has been shown many times that passive index funds generally perform similarly to actively managed funds.
And the service fees charged can vary hugely and can have a big impact on how much money you end up with. Simply put, fees are a big deal.
What is a low fee index fund?
I’ve always been told to get a low fee investment. But when you are new to investing, you don’t know what a low fee is? Is it 0.5%, 1%, 1.25%? What is considered a low fee?
Different funds and investment services have different fee structures. Some charge a flat rate on the total investment balance, while others take a percentage of interest earned.
Do fees matter in investing?
Is the difference in the amount of fee charged really important? I mean, the spread of fees charged is not much more than 1%.
Let’s have a look at 5 different hypothetical funds, each charging a different fee on the total principal. We invest $10,000 into these funds each. And compare the returns every decade, using the 70-year average return of the NZX-50 at 7.8%.
The fees charged by the different funds are, 0.2%, 0.3%, 0.4%, 0.5%, and 1%. We will call the funds by the NATO alphabet; Alpha, Bravo, Charlie, Delta, and Echo. Below is a chart of how well each fund performed.
You can see a large difference between the Echo (2%) fund compared to the Alpha fund (0.2%). But is it significant? The difference between the long-term performance of these two funds is $100,608. That is definitely significant for only a 1.8% difference in fee, which seems low when you first look at it.
Put another way; we can have a look at the total fee for each fund. The table below shows the total fees paid for each of the funds over different time periods.
| Fictitious Fund (fee) | Alpha (0.2%) | Beta (0.3%) | Charlie (0.5%) | Delta (1%) | Echo (2%) |
|---|---|---|---|---|---|
| Total fee after 10 Years | $324 | $486 | $801 | $1562 | $2963 |
| Total fee after 20 Years | $962 | $1427 | $2322 | $4384 | $7819 |
| Total fee after 30 Years | $2286 | $3364 | $5400 | $9833 | $16351 |
| Total fee after 40 Years | $5040 | $7359 | $11624 | $20352 | $31347 |
Here is where it gets interesting- The difference between what you have paid in fees between the low fee Alpha fund, and the high fee Echo fund is $26,304. But the difference in the final amount in investment is more than four times the fee you paid.
Showing you that not only do you lose on the extra fee you pay, you also lose on the lost compounding interest on the money that has been used to pay the fee, which is 4 times as large as the actual fee you have paid.
| Fictitious Fund (value) | Alpha (0.2%) | Beta (0.3%) | Charlie (0.5%) | Delta (1%) | Echo (2%) |
|---|---|---|---|---|---|
| Total value after 10 Years | $22,384 | $22,156 | $21,707 | $20,620 | $18,593 |
| Total value after 20 Years | $46,565 | $45,664 | $43,913 | $39,810 | $32,674 |
| Total value after 30 Years | $96,868 | $94,116 | $88,836 | $76,861 | $57,419 |
| Total value after 40 Years | $201,513 | $193,976 | $179,717 | $148,396 | $100,905 |
What are the fees Charged in NZ
The New Zealand index market has grown in the last 10 years. With more and more passive fund providers operating, I thought it was time to compare what fees they are charging. I’m going to look at fees charged by different fund providers and for interest, let’s look at the peer to peer lenders.
Low-Cost Index Fund providers in NZ
There are several fund providers available now. These include Simplicity, Smartshares, InvestNow, Sharesies, and Superlife. There may be others, but I don’t know about them. If you know any others I should check out let me know!
InvestNow is a different beast to the others in this list. They by far offer a range of funds such as NZ Top 50 Index, US500, etc. Both passive and actively managed. Their fees range from 0.26 for the Vanguard International Fund to 2.72% for the Fisher Fund NZ Growth. The average fee is around 1%.
To start, you need a $250 for one-off investment and a minimum of $50 per fund for an average savings plan. They also charge a $30 annual fee and no transaction fees
Sharesies also offers a range of funds including the NZ Top 50, Australian top 20, and the US500. Their fees range from 0.35% for the US 500 fund, up to 1.30% for the Pathfinder global waters fund, which also has a buy-sell spread of 0.05%. Their funds are mainly around the 0.6% range. And sharesies charges an annual fee of $30.
Sharesies is a great way to learn about investing. With only a $30pa annual fee, you can trade small amounts, and they offer a range of index funds + others.
Smartshares offers you the ability to buy direct (they are an NZX partner). They offer a range of NZ-based index funds to choose from. And have recently improved their interface for investing and changing. They offer a Regular savings plan. Minimum investment per fund is $500.
Each fund has a different fee, but they range from 0.33% for the NZ Cash fund, up to 0.75% for the Australian Mid Cap Fund. The majority of funds are around the 0.5% range.
Simplicity is by far one of the cheaper options and charges a total of 0.31% along with a $30 per year administration fee. Not a bad option, but I am waiting until I get some personal reviews before I look into opening an account.
They also offer an NZ share fund, and NZ bond fund with a fee of 0.10%, which is the lowest I have seen so far.
Superlife has a range of funds, including all the Smartshares ETFs. They charge a $12 pa account fee. They have no minimum investment amount. They only charge the Management fees for underlying ETFs, which are all around 0.5%.
How do they compare to other investment options
For simplicity, let’s compare the fees paid on index funds to the fees paid from Peer to Peer investing.
Peer to peer lending is somewhat new in NZ, and they offer investors a range of returns from 7% up to 20%+, depending on the risk of lending. Only four P2P lenders are operating at this stage. Harmoney, Lending Crowd, Zagga (formally Lend Me), and Squirrel Money.
Harmoney is the biggest P2P network; to date, they have lent more than $800 Million. They charge a service fee on the gross interest charged, which depends on the size of the lenders total outstanding principal. The fee on grows interest charged is 15%, 17.5%, and 20%.
Lending crows also charge a fee on the gross interest collected. Their fee is more modest than harmony at 10% of gross interest collected, regardless of the lender’s outstanding principal’s size.
Zagga charges fees based on the outstanding loan balances. Their fee ranges from 0.9 – 1.95% p.a. of the outstanding loan balance, depending on loan risk grade
Squirrel Money uses a fee charged on the gross loan repayments and ranges from 0.95 – 2.95% p.a. of gross loan repayments made, depending on loan’s risk grade.
As you can see, the fees charged for P2P lending are different from the more simple fees charged for index funds. This makes it hard to compare. Some charge fees on the interest received other charges based on outstanding loans, or on the repayments being made. Either way, it looks like they take a bigger cut than the index funds.
How does My Portfolio look?
I have a number of investment funds with InvestNow after Rabodirect fund business was sold to them. Below is a table of fund I am currently invested in and the fees they charge.
| Fund Name | Fees Charged |
|---|---|
| Fisher Funds New Zealand Growth Fund | 2.35 % |
| OneAnswer Single Asset Class NZ Share Fund | 1.84% |
| Vanguard International Shares Select Exclusions Index Fund | 0.20 % |
| Smartshares - NZ Mid Cap Fund (NS) (MDZ) | 0.60% |
| Smartshares - Total World Fund (NS) (TWF) | 0.56 % |
| Smartshares - Europe Fund (NS) (EUF) | 0.55% |
| Smartshares - NZ Top 50 Fund (NS) (FNZ) | 0.50 % |
| AMP Capital NZ Shares Index Fund | 0.39% |
| Smartshares - US 500 Fund (NS) (USF) | 0.35% |
| Nikko AM Core Equity Fund | 0.98 % |
| Nikko AM Concentrated Equity Fund | 1.84 % |
| ANZ Growth Fund KiwiSaver | 1.11 % |
| Average Fee | 0.94 % |
Wow, that is not good. I will need to do something about that.
Final thoughts on Fees
The bottom line is that you are wasting your time believing that fees are some indicator of long-term fund performance. I will show this in another post. To subscribe to be notified about that.
So you might as well look for a fund that are offering low fees.
I’m not sure what I am going to do with my investments now; a few of them have high fees. I may have to consider selling them for lower fee options. This might also give me a chance to lower the total number of funds I own as well.
If you have a fund in NZ with a fee lower than 0.5% you are doing OK. What do you think? Let me know in the comments.
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I love this analysis! I am in the kill debt to build wealth phase of my journey so I don’t have many investment accounts open (Just a roth for now). However, when I do start opening some more accounts, I’ll be mindful of how fees can slow the growth of my portfolio.
It does surprise many people how much fees can have such a large effect on the long term growth of you investment.
Expense ratios are very deceptive because it does seem like a small % but as you pointed out over years of missed compounding, etc it can add up to the 5 and even 6 figure range.