Follow this topic
Q&A » ISAs
I am interested in putting a Japan ETF in my ISA portfolio. I understand I can buy an ETF in a similar way to buying shares, ie there is a bid/offer spread and I pay for the dealing charge, however there is also an 'annual fee' of about 0.7% mentioned? How does this work, ie when and how is that 0.7% fee taken from my account??
Thanks
Report
410The .7% annual fee is deducted from the assets of the fund by the fund manager. This will result is a slightly lower price. No money is taken from your account.
This is similar to the way Investment Trust and Unit Trust fees work - except that ETF fees are usually lower :)
manzanilla
Posted on 06 January 2010 |
Love 0 loves
Report
6Tx Manzanilla..so just to check I have this clear...over the course of a 12 month period, 0.7% (in this example) will be bled from the ETF value? So if the underlying fund did not move, there would be a linear fall of the value by ( 0.7% / 365 ) each day in the value?
Thanks
Posted on 07 January 2010 | Love 0 loves
Report
272ETFs are just bundles of shares, usually taken to represent an index, which are split into segments. So, for a very basic example, a UK supermarkets ETF could buy £10,000 worth of shares in each of Tesco, Morrisons, Sainsburys and Asda (WalMart, yes I know!), giving a total value of £40,000. This could then be divided into 40,000 individual shares and sold to individuals, with each 'share' in the fund representing 25 pence each of the four supermarkets. Obviously, as soon as the prices of the supermarkets change relative to each other this proportion will be skewed, but this can be rebalanced if neccessary when people buy or sell shares in the fund. In addition, the fund would usually be balanced to the relative market capitalisations, so a UK supermarket fund would have more value invested in Tesco than in Morrisons.
In terms of the costs, as the ETF is composed of a bundle of shares, the costs are usually covered by the dividends and other payouts generated by the shares themselves. So if each of the supermarkets pay a 3% dividend, the fund manager would take around a quarter of this to cover a 0.7% fee, with the rest being distributed to the fund holders as the 'dividend' from the ETF itself. As a result, they are usually taken on a quarterly, half yearly or annual basis depending on when the companies in the fund pay dividends. This is one of the reasons ETFs are cheaper than comparable mutual funds - the mutual funds often automatically reinvest any dividends, so the manager's fee comes from selling some of the shares the fund holds, incurring greater costs.
As a result if, over the course of a 12 month period, the underlying fund value did not move, you should not see any falls in said fund. However, the dividend income your receive from the fund would be much lower than the corresponding shares, as this is where the fee is taken from.
Posted on 07 January 2010 | Love 0 loves
Report
Sign in or register to post an answer.
Register with lovemoney.com to start asking and answering questions on Q&A.
Get started nowRegistered already? Great! You can just sign in to ask and answer questions.
Sign in
Retweet
Comments (
Facebook