Influence of TER on performance

Dear all,

since some time I was doubting one of our mantra of get the lowest TER possible, and if it really makes sense.

Especially I was wondering, that most of the ETF’s money is not coming from private people like you and me, but from institutions, who will be much more regarding on costs than actually some private guy. If this would be the case, all the institutional investors would run for the much cheaper Vanguard funds than their European peers from the other companies.

So I tried to plug in the ETFs in Just ETF. I chose some MSCI World ETFs which have at least 10y track record, mixed it up with distributing/accumulating/swapper etc. The performance is shown in EUR.
The list of the shown ETFs is shown below :

You can see that the TER varies between 0.2% and 0.5%. 0.5%! Geeeez I was thinking, the difference must be enormous.

Now if I get the performance for all 5 of them, I get something like that (max. interval possible, means the timeframe since the youngest ETF has been set up.

Fuck - Not that much difference in the end it seems. Have to zoom it really hard to get a difference…

So for a better view, I did a different chart :

The range is between 307 and 322% of performance.over around 12y. Arithmetic average is 315%. The deviation from average is at a maximum a whopping 2% (sarcasm) over 12y. Was expecting another result to be honest.

Finally,if the lowest TER has actually the highest return and the highest TER the lowest, it is actually not correlating for the other funds.

My take home message : TER is actually not the first thing to look after.Even a high TER fund has to obey to market laws, and if it does not deliver the performance of the index, market players are out and the fund will die. I guess it is more interesting to look at tracking error of the funds towards the index than TER.
For those (like me in the beginning) who mixed VTI and VXUS to get a lower TER, meeeh probably not worth it. If it is to under/overweight US, why not.

All data from JustETF. That is why I did not analyse Vanguard funds (and actually you get more funds with MSCI World than FTSE…). Is there actually a online tool like JustETF, but with more funds than just the EU ones ?

Cheers

EDIT : I guess this result is only valable for Index funds without management risk, and with a high enough liquidity. If you take the Vietnam ETF results might differ ?

EDIT 2 : Typo, it is not 0.02% but 2% deviance from average over 12y

4 Likes

Google total cost of ownership (TCO). It will tell you more than TER.

TCO on the other hand will be highly individual.
I guess anyone will put a different hourly rate for their purchase research… Or how much a swiss broker is worth to them (perceived risk)

I just wanted to see if the TER is actually relevant or not. It seems not.

Nice job, I tried once to do this comparison by hand, but it was not that easy. Total return reinvests dividends, and the logic there is tricky. The question is, which logic does JustETF use and are there no caveats. Correct me if I’m wrong, but I think a distributing ETF will charge the TER by deducting it from the dividend, right? So the unit price will stay as close to the index, but you lose on the dividends. In an accumulating fund, I don’t know how it’s done. The benchmark is different (an accumulating index). So does this index include some margin for costs? Otherwise all accumulating ETFs would lag the index. Unless they make up the difference through other ways (securities lending etc).

In my attempt I tried to compare VWRL with VT and VUSA with VOO, but I was not able to make it work. It seemed like the result depended on the starting and ending price a lot (US and EU exchanges have different opening and closing times…).

I also think VTI + VXUS (which I also have done) is kind of useless. Originally I was swayed by the idea that these funds are far bigger than VT, which theoretically makes them a bit safer.

1 Like

Actually, the same applies when you compare the US based Vanguard Total World Stock ETF with a combination of 85.2% Vanguard FTSE All World, 13% SPDR World Small Cap and 1.8% iShares MSCI EM IMI.

Whereas the us based Vanguard Total World Stock ETF from 31.12.2009 to 31.12.2019 would have yielded about 7.34% p.a.; the IE based comby of ETFs would have yielded 7.72% p.a. This always in CHF, assuming a full return on the US Funds Witholding Tax, annual re-balancing and assuming a marginal tax rate (on dividends) of 35%.

The 5 year picture was inverted, VT was at 7.21% p.a., whereas the Portfolio of ETFs was at 7.02.%.

These deltas probably come from a combination of slightly different Index universes (the Portfolio uses EM IMI for what should be EM Small Caps), creep in Index weights (Small Cap and EM Small Cap Percentages were not static over time) and simply „swung“ prices depending on whether ESTV’s year end prices were at the bid or the ask side of the spread. Another factor is that a separate small-cap vs. large cap investment with quitas can generate minor re-balancing benefits.

No matter what, whether we take additional political risk with the US fund or additional Portfolio complexity (3 vs. 1 ETFs) is mainly a matter of preference but the myth that any ETF other than US ones were a bad investment is simply a myth.

This particularely applies if we decide to invest with two funds only and cover Emerging Markets Small Caps with Developped Market Small Caps (aka 85.2 FTSE All World and 14.8% SPDR Small Cap). This leads to 7.85% over 10 years (vs. 7.34%) and 7.07% over 5 years (vs. 7.21%).

Forget about all this „only invest in US domiciled ETF and then die trying to claim back withholding tax“. Opportunity cost on the time spent until you get the 15% back definitely kills that case.

3 Likes

I did not get the same conclusion from your chart. Lyxor ETF delivered 322% with 0.2% TER, and Ishares ETF delivered 307% with 0.5% TER on the same benchmark. this is 15k difference for 100K invested 12 years ago.

The X tracker ETF that distorts the analysis (being expensive and delivering a strong performance) is accumulating, and is not comparable. Not sure how just ETF adust for total return representation for accumulating vs distributing…

The mantra is not to go for any lowest TER. it’s to get the lowest TER for the same broad index benchmark.

TCO isn’t individual. Tracking error and securities lending have a significant impact on the performance difference. TER is only one part of the whole story.

How can it be not individual if TCO depends on broker, time for purchase research etc ?
Or are we talking about a different TCO ?

And showing that the TER is not the whole story was the whole point of the post…

How can it be not comparable, an accumulating ETF on the same Index (here MSCI world) would have (theoratically) the exact same companies inside its fund than a distributing…

The difference between the worst and the best funds is about 4% over 12y. That is more comparable than the daily volatility.

Dude you went overboard with that one. Reclaiming the withholding tax costs me an extra 5 minutes when doing my annual tax declaration. They always pay.

2 Likes

The analysis is good but you missed 3 critical points to understand these differences

  • Is the ETF replicate with Swap or physically? Swaps is riskier but reduce the US withholding tax (That’s why Xtrackers and Lyxor have better performance)
  • Where the fund is based? Ireland and Luxembourg have different tax rate for the US withholding tax
  • Lending. ETFs lend share wich bring more income and reduce the TER

If everything else is equal (BIG assumption!), then over 12 years the more expensive fund returns 0.995^12÷0.998^12=96.45% of the cheaper fund on average. That should settle that discussion. The rest of the difference stems from differences in the fund’s behaviour.

Now, should you care about that? I think so, but please remember in your discussion that the mantra originally comes from the time where the typical cost for the recommended (active) funds was 2%+20% of performance, which is substantially worse. Ignoring the performance bonus/penalty, compared to the 0.2% TER the super expensive fund would return only 0.98^12÷0.998^12=80.38%. Now that we are in a much better place, those differences will not be as big anymore.

So is the mantra “Optimize TER at all cost” still valid? I disagree on the ‘at all cost,’ since we’re now talking about really small absolute differences. Multiple people on the forum take some worse conditions in return for staying at a swiss broker. Others have a larger emergency fund. It’s just a tradeoff that everyone has to decide on for themselves. However, if you still pay >0.5% for no good reason you probably can do better without much tradeoff.

5 Likes

Its 5 mins if it works and more if you need to talk with the Tax Guys and Stuff. Even ifits 5 years only, you wait at least a year until you can report it, and then you wait for them to pay things back. In the meantime, you incur opportunity cost of 8% p.a. :stuck_out_tongue:

It’s a few minutes to maybe an hour work(in my case, because I like to own 7-8 etfs) for a few hundred CHF.

The opportunity cost is maybe 8% on the withheld amount.

1 Like

It my be true that many of us overestimate TER, but nontheless if you have two ETF tracking the same index it is worth looking at it. But I would agree with you, other aspects are important as well (liquidity, issue surcharche ect.). If you invest 5k quarterly over 25 years in an ETF (thesaurierend) which gives you 4.5 % growth (price) and 2 % dividends TER of 0.15% will give you around 60k more than one with TER of 0.5%. (total sum +1.1Mio).

If you were to save for example in 3a over 40 years, it would make a difference of more than 200k. (I know you can’t save 20k per year in 3a unless self-employed)

You can calculate it yourself: https://www.zinsen-berechnen.de/fondsrechner.php

1 Like

Don‘t agree here. UBS ETF on Swiss Stock Indices for years beat iShare ETF on the same indices. Even if iShares comes with a lower TER.

What matters is the tracking error, post tax. An ETF Providors Ability to replicate an Index is a matter of skill. Even in full replication ETF (which is a minority), you can see differences in how well they manage to process in-and-outflows so that it leads to optimal returns. On top of this comes both expense and gains that are not covered in the TER (e.g. FX, Trading Fees or Security Lending Returns). Plus we need to see that the definition of what a TER covers vs. what not is not 100% the same.

Ultimately, its as well about total return. ETFs fairly often deduct TER from dividends, meaning we get a tax benefit on the TER. Conclusion, a fund with 0.01% higher TER yet 0.01% higher pre-TER return gives you 0.0035% more return.

Ultimately, we as well need to consider Index Funds. ETF must not optimize returns beyon genuine Index hugging, as they can be short selled. Index Funds in the contrary may do so. This is often used at corporate evebts. The way how you deal with capital increase rights (exercise vs. sell; what day to do) can have systemically repeatable return impacts. Index Fonds may optimize this way and probably squeze out another 0.05% or so of positive tracking „error“.

I would recommend to have a look at TER but then mainly model past return /tracking error and follow this one but not just TER.

Same with the above, back to TAX. Theoretically, holding US based MSCI World makes sense, in oractice the difference to IE based ETF is nearly Zero and probably not worth the hassle.

Think about it… when a buy/sellcosts you 0.5 to 1.5% (post spread and FX)… do you then really care if you could swith from one ETF to another, just because of 0.05% of travking error?

1 Like

If you talk about CHSPI (iShares) vs SPICHA(UBS) take care because on JustEtf they display the wrong performance data for whatever reason.
If you look at the Ishare and UBS prospecta CHSPI is consistently delivering better performance than SPICHA.
Not saying the other factors you mentioned can be completely disregarded, but your example just demonstrates that lower TER delivers better performance.

…and that JustEtf is not a very reliable source of information. I stopped using it when I discovered this exact issue last year.

My reference points at the SLI and SMI ETF. From a return point of view, I neither trust justETF nor Fund Providers stats. The ESTV is the best source to get long term return data that can actually be achieved…

For these indexes the UBS ETFs come with lower TER, and as you said before:

Which once again would point towards lower TER delivering better performance.

By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, vous confirmez avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/