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 **

Lump-Sum | InvestNow | Hatch |

Total Fees | $2,053.20 | $260.97 |

Total Portfolio | $63,059 | $66,776 |

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.

Regular | InvestNow | Hatch |

Total Fees | $8515.78 | $3737.93 |

Total Portfolio | $329,389 | $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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This is really useful stuff. Two things:

1. Conversion fee for lump sum of $10000 NZD would be 10000 * 0.66 * 0.005 = $33 US

2. When calculating ROI over 10 year period we might want to include Hatch conversion fee on withdrawal as well.

Cheers.

Hmm, dropped a zero- will fix that. And about withdrawal- you are right that is something you should include. I may have with that later.

Nice work crunching the numbers. That order of magnitude in fees really made a difference.

Just remember that I have not calculated anything to do with FIF tax. That can make a significant difference

I am surprised Hatch is cheaper with the regular payment plan. How would this differ for a $1000 lump sump with regular $100 monthly payments for example?

It all depends on the time frame and the deposit amount. It would be cheaper to go with InvestNow or similar than with Hatch with a $100 regular investment plan because of the conversion fee. If you did one $1200 investment with Hatch a year it would be cheaper on fees over the long term. But that’s not very convenient. And to be honest there isn’t much in it. FIF tax might push it the other way and make it cheaper to invest in the smartshares S&P500. 0.34% is already quite low and no FIF tax to consider.

I love the low investnow vanguard 0.20% fee but not that associated $1600 FIF tax & paperwork! It hurts to pay $1600, any thoughts on how I could do it better, or is there little difference if switch to something like smartshares 0.34%? Thanks, really appreciate your articles

Yeah that is a lot of tax- are you above $50K? You’d have to run the numbers. One day I’ll get around to it- I suspect it would be cheaper if to be in the Smartshares US500, or AMP global than Vanguard if you are over $50k- but don’t quote me on that.

Did we find out this answer? I’m getting close to 50k now and starting to worry maybe Hatch and fif rules is going to kill me with tax and head ache

Hey Ben, I haven’t looked at it for a while. I wouldn’t worry about it being difficult. Hatch should calculate the numbers for you. I would just worry about it being more expensive. Again- I need to read into it more- but I think the 50k might be related to purchase and not the value as it increases. But I could be wrong here.

Hi,

Great article!

Cant wait to read your updates for FIF tax & paperwork & withdrawal fees – that will give us an even more complete picture. Do you have an ETA for this?

Secondly, above you mention “suspect it would be cheaper if to be in the Smartshares US500, or AMP global than Vanguard if you are over $50K” – who would be able to answer that question, supported by facts?

Also, are you on the /PersonalFinanceNZ subreddit? Might make comms easier.

Cheers

Thanks for the comments. Yes, I am on the NZ personal finance subreddit.

It will be some time before I get around to updating my FIF article and take a closer look at over 50k. Currently on holiday 😋

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 one share, and $0.02 USD per share, with a minimum of $8 UDS- so anything above 400 you’ll pay a flat rate of $8 USD.

I dont think thats correct https://help.hatchinvest.nz/en/articles/1804694-what-are-your-fees

$3 to buy a fraction of a share 0 -399 $8 more than 400 then you pay more that $8 see link

Yes, you are correct- I will fix it now. Thanks

Hi thanks for the good comparison between InvestNow and Hatch. With the recent announcement of Hatch dropping their fees (https://www.reddit.com/r/PersonalFinanceNZ/comments/g0ucel/hatch_dropping_fees/) could you please update the comparison?

Hey there, Yes- I did read about Hatch lowering their fees over the weekend- I just haven’t had time to update my posts yet.

There was a post on Reddit a while back comparing buying Smartshares on Investnow vs Buying Vanguard direct on Hatch: https://www.reddit.com/r/PersonalFinanceNZ/comments/ciswpw/hatch_or_smartshares/

I’ll cut and paste the comment:

Yes you should invest through InvestNow if you plan on buying Smarshares ETFs when they are on Smartshares.

For this example I will use the S&P 500. Which is represented by Smartshares U500 (USF) on InvestNow and VOO on Hatch.

Fact: In the long-run using Hatch to own directly through Vanguard is better. (With some reasonable assumptions of course)

Let me assume for these calculations you are at the 33% tax bracket and your PIR is 28%.

InvestNow costs: 0.34% per annum, and you pay 28% on 5% of opening value as tax. This is because you are investing in a PIE that invests overseas, and they are forced to use the FDR to calculate tax, which is passed on to the investors in the ETF. If you had an opening value of $100, you are paying tax on $5 (5% through FDR), and will pay PIR x $5, which at 0.28% is $1.4. This is high tax.

Hatch: Costs 0.03% per annum, and you pay $8 USD per trade, and you are paying 50 basis points in FX fees ($5 per $1000 exchanged). If you are under $50,000 in all foreign assets (not including those in PIE’s), you will be paying tax on dividends alone. The dividend yield for VOO is about 2%, so you are paying 33% x 2% which is 0.66%, under half that you pay with Smartshares. If you had over $50,000 you’d be paying anywhere between 0% and 5% tax through the FDR or CV tax methods. Looking through the past history of VOO about 25% of the years you’d be paying 0% tax on opening value, you can also run simulations using means and standard deviations of the historic index returns and get similar findings. But at a 5% higher tax rate, you’d be worse off if returns were generally always above positive 5%, and better off it returns were 0% or under 4.2% (breakeven value).

One assumption I’ll use for this example, but feel free to change, is that you have monthly contributions through hatch, this is because you want to trade less frequently while still contributing to your investment. This means in one year, you’d have fees of $96 USD which is roughly $144 NZD in broker fees, add to this 50 BP of your yearly contribution. Let’s assume you were investing $400 a week in InvestNow, so you invest $1600 a month through Hatch. You’d be investing 20,800 a year and have FX fees of $104 NZD, add to this $144 NZD to get $248 in total fees to Hatch.

Now I’m going to exclude the management fees for this calculation, but let’s try find the amount you need in your portfolio to have equivalent fees to what you’d get through InvestNow. $248 / 0.34% gives us $73000 with rounding, so you need around $70,000 for Hatch to start to break even, excluding tax.

Now if you add the tax advantage for being under $50,000. This breakeven point is around $20,000.

InvestNow and Smartshares is cheaper for smaller portfolio’s, but Hatch is better for large portfolio’s where the broker and FX fees become relatively small. Overtime the benefit of Vanguard’s low fees will really payoff.

You will need to calculate things for yourself for your own investing situation. But the point about having a large tax advantage below $50,000 is important, as well as the fact you need a larger portfolio before Hatch’s brokering and FX fees being less than the management fee from Smartshares.

So yes, if you were going to put $500 to $1000 on an ETF, it would be cheaper through InvestNow given that’s all we are computing cost wise.

Hope that helps your decision making =)

Is there any reason why you recomend the AMP Total World fund on InvestNow over the smartshares total world fund on InvestNow? Smartshares has a .4% fee vs a .45% AMP fee

The reason doesn’t exist anymore. The AMP fee used to be 0.39% but they have increased it to 0.45%. So no- I don’t think I would recommend the AMP fund anymore.