Smartshares Exchange Traded Funds: Understanding the Unit Price

I’ve recently had a few email questions regarding Smartshares and their unit price, so I thought I would try to answer them here so that you can also get your head around how the Smartshare funds work. Again, I am not an expert- I’ve tried to answer these questions both from what I know, doing research, and just reaching out to the providers themselves.

Generally, I have found that the investment services in New Zealand are very approachable- if you have a question, ring them, or flick them an email. After all, you are paying them for a service. I don’t mind asking them on your behalf though, so keep emailing questions.

Some background. Smartshares, who are owned by the New Zealand Stock Exchange (NZX), offer you access to 35 ETFs with fees between 0.33% and 0.75%. The ETFs cover a wide range of sectors including Kiwi companies, global companies, emerging markets, mining, property and bonds and government debt.

The entire list of ETFs that they offer can be found here. The more well known ETFs include the Smartshares NZ Top 50, and the Smartshares total world fund- which invests entirely in the Vanguard total world fund (VT). In fact- the majority of index funds offered by Smartshares have identical funds offered by Vanguard or iShares. Now let us get on with the questions.

Why are Smartshares unit prices different to the underlying Vanguard or iShares funds?

When you start to look into buying Smartshare funds and realise that they are entirely invested in either Vanguard funds or iShare funds, you start to wonder why the unit prices are different. For instance, the Smartshares Emerging Markets Equities ESG ETF fund‘s unit price is currently $2.35 which invested directly into the iShares MSCI EM IMI ESG Screened UCITS ETF USD which has a unit price of $6.85.

$2.35 vs $6.85. The iShares fund is nearly 3 times more time expensive than the Smartshares fund. So the Smartshares fund is a bargain, right?

It’s easy to get confused as to why the unit price of the two funds are not identical, while they are supposed to be invested in the same thing. You might start to wonder if the difference is due to the trading volume between the NZX and the US markets. The difference in trading might have pushed the unit price of the iShares funds far higher than the Smartshare equivalent fund.

If the Smartshares ETF is 99.99% the same as the iShares/Vanguard ETF, why are the prices different?

One of the main reasons that the prices are so different is that the two funds have different benchmark dates and values.

  • The iShares fund launched in October 2018 with a value of $4.94.
  • The SmartShares fund launched in Jun 2019 with a value of $1.97

But how can the unit prices be different? It all depends on the number of units they each issue. If you have $10 million worth of shares, and one fund issue 5 million units, the price per unit is $2.00. If another fund has the same $10 million worth of shares issues 2 million units, the price per unit is $5.00.

I suspect that the iShares fund was aiming to start with a unit price of $5.00 per unit, and the SmartShares fund was aiming for $2.00 per unit- but it’s possible that market movements or brokerage fees could have decreased the unit value of each between the time of creating the fund and actually issuing it. But I’m just guessing here.

Here’s what the Smartshares team has to say about the unit prices of their funds.

The price is arbitrary and was set based on what we’ve deemed to be most appropriate for NZ investors. So, mostly a marketing or visibility decision. Note that the return on the funds will be the same/similar regardless of the price we set, as you have an interest in the underlying ETF even though they can have different prices.

Smartshares Team

From what I understand, this means that Smartshares ETF price is based on a formula relative to the underlying ETF. This is purely for Smartshares to get the funds unit price that is more relatable to NZ investors. For example, if they priced $1 for $1 with the Vanguard total world fund, but in NZD, their unit price would be around $125 per unit. But using their formula- their unit price on the ETF is currently $2.55

Smartshares does not allow fractional Unit sales of their ETFs. So a fund with a unit price in the $100’s would not sell very well for NZ retail investors like you and me who like to dollar-cost average. Purchasing regular small amounts of say $50 per month-we would only be able to buy a unit every couple of weeks.

Does having more fund units mean more returns?

So you can understand why it makes sense that Smartshares wants to price their ETF at an affordable unit price for NZ investors.

But let’s now say that you were an investor who had $1000 to invest- and you want to invest in the Vanguard total world fund. If you bought from Smartshares, you could buy around 390 units at $2.55 each. If instead, you bought the Vanguard fund directly, you could only buy 8 units at $125 each. Would have more return from buying Smartshares because you could buy more units?

No- not really. Owning more units does not mean you will get a better return. That’s not really how percentages work. The absolute change in unit price might be different, but the percentage change overall will be the same.

Say you invested $1000 in each, and you have 10 Vanguard units at $100 and 1000 SmartShares units at $1. Just to keep it simple. The vanguard fund might go up from $100 to $110, and the SmartShares units from $1 to $1.10.

If you look at the unit price, you might think that your return would be larger if you owned the Vanguard fund, as the absolute increase in unit price is larger. Then again, it might also seem logical that you would make more from the Smartshares because you would have more units. In reality, the return is the same.

10 x $110 = $1100
1000 x $1.10= $1100

Why do the charts look so different then?

Why do the charts look so different between the Smartshares and iShares emerging market funds when they are the same? If you download the unit value date for the Smartshares and iShares emerging markets fund for the last year, or so and plot them on the same graph you get this;

Just looking at the graph, you might conclude that the iShares fund is a better choice. The Smartshares fund has bearly increased at all, whereas the iShares fund has clearly made some returns. This graph is misleading.

What’s going on?

Well, since in answering question one, you know that the underlying unit price of each fund is arbitrary. The price only depends on how the fund manager sets up the fund. This means that you can arbitrarily normalise the iShares and SmartShares funds to a particular date to compare the two. Say we normalise them both to May 2019. This is how both funds compare over time.

You can see that both funds follow a similar trend, but are not exactly the same. It looks like you may have been better off with the iShares fund as it had a bigger increase following the March downturn. But then again, the SmartShares fund didn’t fall as much in March- So maybe that fund it better. Again, this graph is also misleading.

There is one thing left to do after normalising the graph to be able to compare the two funds truly. We have to convert the iShares fund, which is in USD, to NZD. This will allow us to compare the Smarshares fund directly to the iShares fund.

So what do they look like if you convert both to NZD? Are they the same then? Well they are close.

Why are they still different?

After normalising and converting the funds to the identical currency, you can see that they are pretty much the same. There are slight differences still. I tried to do some research as to why this would be the case. And from what I’ve read, this could be due to what’s known as “Tracking Error”.

Tracking error is just how close an ETF matches the performance of the Underlying Index. And according to a study in 2017- NZ ETFs are not as good as global ETFs in tracking their indexes. Saying it in another way- NZ ETFs have larger tracking errors.

Since there is tracking error for both the iShares and Smartshares funds they will never be truly identical. Then again- my currency exchange data could have also introduced this error. Who knows? If you are a long term investor they are near enough identical.

I hope that this will help you understand that the unit price of a fund is not that important. And that you can’t directly compare Smartshares funds directly to Vanguard funds. I’ve seen this question appear on many chat forum- and the most common mistake is to not account the different currency of each fund.

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5 thoughts on “Smartshares Exchange Traded Funds: Understanding the Unit Price”

  1. Great write up on unit pricing.
    Would be great to see a similar analysis with fees.
    The vanguard TWF has fees of 0.08% (80c per $10k) for direct personal investors in the US.
    So this raises a number of questions
    1 Why is the Smartshares TWF fee 5 times that ($4 per $10k)? Of course we need to allow NZX some leeway to create and enable unit trading and setup as a PIE and handle tax. However does this justify 5 times the fee being charged to retail investors in the US?

    2 if indeed the above is justified then why did the NZX recently reduce the TWF fee by 25% (was 0.54% now 0.4%). In other words what changed to suddenly reduce the fee? Is this the start of regular review so we can look forward to further reductions?

    3 currently the Smartshares TWF fund is $80m netting NZX $256000 in fees (i am assuming vanguard charges .08 so NZX net fee would be 0.32). On the assumption that is what is needed to run the product then why isn’t the NZX promoting their investment products more heavily in this low interest environment? If NZX were to double the amount in the TWF fund then it follows the fee must decrease close to 0.2 or 0.3% to maintain the product profitability.
    Imagine for a moment that NZX were able to convert 1% of the $152b in term deposits to investments in the TWF. That would swell the fund to over $1.5b and to maintain product profitability the fee would shrink to a tiny 0.02 plus the vanguard fee.

    4 The cynic in me thinks that vanguard “had a word” to the NZX to reduce fees to align to Vanguard principles. The recent decision by Vanguard to allow direct personal investments in Australia seems to allude to this. Vanguard did this to a $100b market share, given kiwisaver is $70b then do you think vanguard will get interested in offering direct investments in NZ once the investments in NZ reach the magic $100b threshold?

    Cheers Dave

    Reply
    • You have definitely put some thought into it. Unfortunately- I don’t think I have the answers for you. And I would like to see the fees decreased over time- I think that because NZ is such a small market the fees are generally higher than overseas. I’ll have a think about it.

      Reply
  2. Super useful posts, thank you!
    You’ve explained the unit price well, but I don’t understand why the percentage returns are so different?
    For the iShares MSCI World ESG Screened UCITS ETF, the returns are 19.3% over 1yr (see below):
    YTD 1m 3m 6m 1y
    Total Return (%) 19.36 7.31 19.54 31.53 19.3
    as of 31/Dec/2020

    But then you look at the Smartshares Emerging Markets Equities ESG ETF (EMG), which is supposed to track it 100%, and you get a 1yr return of 10.89% (before fees and taxes, 9% with both taken). See below…
    1mo 3mo 1yr
    Returns (Before fees, before tax) 4.37% 6.01% 10.89%
    Underlying ETF Returns* 4.38% 6.01% 10.90%

    Why are they so different?!? I’m sure it’s a simple explanation but can’t figure it out. It’s different again from the InvestNow page, which says 1yr returns are 7.58%.

    My brain is melting trying to choose a good global ethical option.

    Cheers,
    Kerry

    Reply
    • I’m assuming that the percentage return is different between the iShares and Smartshares is the change in the NZD to USD conversion. If you $10k USD last year you would get around 6.6k USD- 1 USD was 1.51 NZD. Now if you convert that back to NZD today it’s worth $9139- about a 9% drop- which is on par with what you report-iShares 19.3% vs SmartShares 10.90%.

      As to why the InvestNow value is so different I do not know.

      Reply

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