Page 29 - Profile's Stock Exchange Handbook 2020 Issue 4

Profile’s Stock Exchange Handbook: 2020 – Issue 4

Shares (or ‘units’ in CIS parlance) are sold by management companies at net asset value. The cost of ETFs
on the open market is determined by supply and demand, but arbitrage ensures that the difference between
the NAV and the market price is never very large (usually less than 0.5%).
Usual JSE dealing costs apply if you buy ETFs through a stockbroker (ie, brokerage, Strate fees and the
investor protection levy). Brokerage is the biggest component and depends on the broking firm (JSE
Dealing Costs). Transaction costs, in total, are typically between 0.5% and 1.25% via a stockbroker.
Note that ETFs are exempt from Securities Transfer Tax (STT) (0.25% of the transaction value) which is a
significant cost saving.
If you buy ETFs direct from the management company, brokerage and other transaction costs apply and STT can
apply if the underlying basket of index shares are purchased to create new ETF securities for listing on the JSE.
Overallentrychargesleviedbymanagersare0.4%orless,butthereisnormallyahighminimumtransactionsize.
‘Investment plans’ or LISPs facilitate transactions that are not channelled directly through stockbrokers.
They typically charge an annual management fee for administering the account – this is a percentage of the
amount invested. Although sometimes more expensive than purchase via a stockbroker, investment plans
are ideal for debit order investment, reinvestment of dividends and low cost switching between ETFs.
Brokerage charges and other transaction charges are levied for any sales of ETFs, through stockbrokers,
investment plans or Mancos.
Annual Costs
ETFs do not charge an annual fee against the portfolio in the same way as unit trusts. Instead, the manager
of an ETF recovers his costs and applies a margin to the transaction costs which is recovered from the
portfolio income. ThisispartoftheTER(Total ExpenseRatio)reportedbyeachETF. NotethatsomeETFs
make it part of their deed to maintain the TER (including their costs) below a certain level. The TER is
expressed as an annual percentage of the fund value. The TER for ETFs is typically much lower than the
equivalent charges of actively managed funds.
Note that the annual management fee charged by an investment plan is over and above this TER of the ETF.
This fee does not apply if you purchase through a stockbroker. (The broker may have a monthly account
administration fee, but this is a separate issue and not directly related to which securities are held).
As CISs, investors fall under the regulatory and legislative control and protection of the Financial Services
Board. In addition, as listed securities, ETFs are governed by the regulatory, compliance and listing
requirements of the JSE.

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