A road trip to financial freedom
| Financial freedom | Retirement | ETFs |
|---|---|---|
| TFSA | Offshore | Property |
| Markets | Investment terms | Fees |
Topic: Fees
This much we know is true: at the first level, the fund level, an ETF is almost always cheaper than a unit trust tracking the same index. But at the next level, the trading platform or product level, access fees need to be added to the ETF costs for a fair comparison, as it’s impossible to buy an ETF without this next level of fees. Comparing ETF and unit trust fees at fund level only is a very common mistake.
Mr Money Mustache, the Frugalwoods and almost every FIRE blogger I know choose index tracking funds (passive) for their investment portfolios. This ‘everybody is doing it’ argument is not the one that convinced me to start switching into passive, though. But when Warren Buffett started recommending index trackers, I found myself paying attention.
This year I picked a global equity fund for my TFSA and started wondering how the Allan Gray TFSA gets around the dividend withholding tax charged on the offshore listed companies in which I’m invested via the fund. It turns out, there’s no avoiding it. TFSA investors do pay withholding tax on foreign dividends and interest.
There are a few misconceptions around ETFs vs unit trusts going around. One is that an ETF is passive and a unit trust is always active. The other more worrying untruth is that ETFs are always cheaper than unit trusts. When looking at the overal cost on fund and platform or brokerage level, a unit trust often beats an ETF cost-wise. Which should you choose: ETF or unit trust?
The FIRE movement has become obsessed with choosing funds with the lowest fees. But are we forgetting the main driver of portfolio performance - asset allocation? 2020 has been an excellent example of how different asset allocation choices can lead to wildly different investment returns.
If there’s only one investment product in your long-term investment portfolio, surely it has to be a tax-free savings account (TFSA). Since TFSAs started in 2015 the number of TFSA providers have grown rapidly, pushing fees down (great for investors). But the levels of service you get with these products vary hugely. Where do you go for the best tax-free account in SA?
Fees need to be hunted down no matter how deep they’re hiding and cut if they’re for a service that adds no value to your life. So, how do you find out how much you’re really paying? Well, start by looking out for the three A’s of investment fees - advice, admin and asset management - and pin those hairy figures down.