Switching from managed funds to lower-cost exchange-traded funds (ETF) products could save Australian investors nearly $4 billion in total fees per year.
ETF provider Global X has examined whether managed fund investors are unintentionally paying more in annual fees to active managers over passive ETFs.
Managed funds in Australia are valued at approximately $3.9 trillion, according to the Investment Company Institute, while ETFs comprise less than 5 per cent of this total.
However, ETFs are enjoying a five-year compound annual growth rate (CAGR) of 32 per cent per year, in contrast to the managed funds industry at 7 per cent in annual growth.
“With so much money still sloshing around in managed funds, Australians may be unknowingly paying more to active managers than they need to for a similar investment exposure via a passive ETF,” Global X stated.
“Investing is one of the few things in life where the more you pay the less you get. Every saved dollar is more money in investors’ pack pockets.”
According to the ETF issuer’s analysis, switching to lower-cost ETFs from managed funds could save investors up to $3.9 billion per year in total.
Even changing to the weighted average fee of a similar investment category in the ETF sector could save managed fund investors approximately $2.2 billion per year, Global X found.
The key reason behind this is that ETF fees are “substantially lower” than fees for managed funds, particularly for actively managed strategies.
Average managed fund fees in Australia were 0.93 per cent per year, while average ETF fees were around half of this figure, Global X stated, with some ETFs charging under 0.10 per cent each year.
“The majority of index-based ETFs aren’t costing investors too much money relative to their more expensive managed fund counterparts. Even though active ETFs account for 21 per cent of the total ETF assets, they generate 46 per cent of the total industry fee revenue.”
As investors look towards cheaper investment vehicles over traditional unlisted managed funds, Global X expects the migration from high-cost to low-cost investing to continue in the future. The moving capital from managed funds to ETFs will also see overall fees paid to the financial industry likely decrease.
“While this may not be favourable for traditional fund managers, it’s a great outcome for investors.”
Echoing recent data released by the ASX and Vanguard, Global X observed that the Australian ETF market surpassed the $200 billion assets under management mark to $204.4 billion across 380 products. This was underpinned by more than $21.4 billion in net inflows, positive market movements and several unlisted active funds converting into active ETFs.
