A fee week ago I wrote a post outlining how you can get access to Vanguard’s Index fund from New Zealand. I don’t think I need to point out why you would want to invest in Vanguard- it’s widely known that they have a range of low fee, well-diversified index funds.
And then last week- I had a look into whether or not fees are correlated to returns for all the funds on the InvestNow platform. The results didn’t help my case that lower fees are better- as the 10-year average returns showed a weakly correlated positive trend. Meaning that higher fees do produce higher returns. Read more about it here.
In terms of investing nothing is guaranteed- past returns don’t have any bearing on future returns. The exception is fees- that is the one thing that is guaranteed with investing. And it’s the one thing that we have direct control over. So it makes sense to try and minimise the fees you pay.
So why focus on Low fees
Fees can add up over time. Fees are very deceptive. They are generally small, normally a few percent or so. Year on year the fee will not only eat into your return, but you will also miss out on extra compounding of your money.
To illustrate whether or not fees really matter when it comes to investing consider an investment of $10,000. The difference between a 2% and a 0.2% index fund both earning a 70-year average return of the NZX-50 of 7.8% over 10 years is $3,791. And it gets worse over longer periods. Over 40 years the difference is a cool $100,000, all from two investments with a fee difference of 1.8%.
A difference of $100,000 is not to be laughed at. And it can even be worse than that if the fees are higher.
Ok- so you might be thinking don’t higher fee funds produce better returns? Well, its generally believed that fees have no bearing on returns. And when I look at all the fund on InvestNow- there was a very very weak positive correlation but a large spread in performance. Most notably the two SmartShares funds performed better than the majority of funds and had some of the lowest fees.
To me, it makes sense to seek out the fund with the lowest fees available to you. Fees, just like taxes and death, are the only guaranteed thing in life. And one of the fund providers that internationally has the lowest fees in town is Vanguard. Their funds start with a fee of only 0.03% for the US500 fund.
To find out- I’m going to compare a couple of situation with a few different indexes- the US500 index- which you can access through InvestNow with the Smartshares US500 fund or through Hatch with the S&P 500 Vanguard ETF- mainly because I have funds in the Smartshares US500 fund- but you’ll get an idea of the difference in fees and expenses either way.
When comparing the two providers- InvestNow is pretty simple- no annual fees or exit-entry ratios, but there are fund fee. With Hatch, you have to consider trade fees, currency exchange fees, and tax filing fees. Trade fees are either $3 USD to buy or sell a fraction of one share, and $0.02 USD per share, with a minimum of $8 UDS- so anything below 400 shares you’ll pay a flat rate of $8 USD.
April 2020 Update: Soon, Hatch we’ll be lowering their fees to a flat rate of $3 for orders up to 300 shares, and $0.01 a share after that. That means that this comparison is somewhat out of date. One day I will endeavour to re-do the comparison- but at the moment I can’t find my spreadsheet containing it.
So let’s assume and investment timeframe of 20 years and compare the two funds with fees of 0.34% vs 0.03%. I’m going to ignore tax and dividends, and assume a return of 10%- possibly quite high for 20 year period, but the US500 fund has averaged 13.44% over the last 10 years.
$10,000 Lump Sum Investment
Calculating the fees for InvestNow is somewhat easier than Hatch- there is just the annual fee to take into account. So the annual fee of 0.34% on $10,000 with an assumed return of 10% over 10 years will be $2053.20. Over that period the balance of your investment will be $63,059 so not too bad- considering if there was no fee your ROI would be $67,275
The fees for Hatch are somewhat harder. If we assume a NZD to USD exchange rate of 0.66 cents, then the 0.5% conversion fee would cost you $33 US. And since the Vanguard US 500 fund’s unit price is close to $300 per unit we can assume an $8 US entry fee and then there is the $1.50 initial tax filing fee. So the initial cost to enter your $10,000 position will be $42.50USD or $64.40NZD. After that its a straight calculation of 0.03% per year and 0.5USD tax filling. The total fees paid using Hatch will be $260.97. Over that period the balance of your investment will be $66,774.59
The difference is both in fees you paid and compound interest lost. With Hatch, you have lost $499 compared to the ROI without fees, and with InvestNow you have lost $4216. So in both cases, a magnitude change in expense ratio results (0.34% vs 0.03%) in a magnitude change in fees paid ($2053.20 vs $207.37), and a magnitude change in lost compounding ($4216 vs $499)- which makes intuitive sense.
Regular Investment Plan
With a lump sum, it looks like Hatch will be cheaper as you only pay the one set of transaction fees. But with a regular investment plan- you’ll be paying the currency exchange fee and brokerage fee every time. So let’s see the difference in fees and returns with a $500 per month regular investment plan.
Same assumptions as above- return of 10%, No tax or dividends, and for simplicity- fees calculated on total yearly balance.
Fees paid with InvestNow will come to a total of $8515.80 with a total fund balance of $329,389.
Fees Paid with Hatch will come to a total of $3737.90 with a total fund balance of $333,997.
This surprised me- I honestly thought that Hatch would be more expensive as every time you deposit money into Hatch you will be paying a brokerage fee of $8USD and a 0.5% conversion fee- so for 500 regular investment 12 times a year, you’d be charging around $150 in brokerage and conversion fees alone. But since the Vanguard fee is only 0.03% your average fee stays relatively flat compared to a fund with a fee of 0.34%.
Hatch fees are linear, whereas Invesnow is more exponential. This does rely on the fund is increasing year on year.
To Sum Up
If I was to sum up which is cheaper- to be honest- I don’t think you need to worry about the difference between 0.34% and 0.03%. Once you have started investing and chosen funds below 1% you are doing better than the majority of investors. When you get down to these numbers you are looking at a difference in return of about $3700 with a lump sum investment of $10,000 over 20 years, or a difference of $4600 with a $500 per month regular investment plan- and that’s not assuming any tax or dividends.
The numbers could easily swing the other way if you included tax and dividends. Now if you want to keep things simple- I’d say stick with InvestNow and a fund like the AMP total world fund at an expense ratio of 0.39%. If you don’t mind the FIF rules you can choose the Vanguard International Shares Select Exclusions Index Fund- but If you are going to be dealing with FIF and investing over the long term- then Hatch might be something for you.
The other benefit of Hatch is the large number of low-cost funds to choose from. Vanguard S&P 500 ETF at 0.03%, Vanguard Total World Stock ETF at 0.09%, Vanguard ESG International Stock ETF at 0.09%- and many others. But in reality- just having a regular automated investment plan will benefit you more than worrying about 0.1% in fees- it probably comes down to personal preference in which platform you like to use.
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