South African investors can get exposure to the S&P 500 through the Satrix S&P 500 ETF and not lose much money because of higher fees.
The Standard and Poor’s 500 (S&P 500) is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States.
Many exchange-traded funds (ETFs) offer access to the S&P 500, including the Satrix S&P 500 ETF listed on the JSE.
However, the ETFs are not exactly the same, as they have different fees.
Fund management fees are an important consideration that many investors overlook when choosing investment funds.
When funds managers charge high management and performance fees, it could deteriorate growth and create poor results.
Many studies have shown that only a small percentage of actively managed funds outperform their benchmarks while charging much higher fees.
Unlike actively managed funds, passive index tracker funds, like the Satrix S&P 500 ETF and Vanguard S&P 500 ETF, mimic the market by tracking the S&P 500.
An attractive feature of index tracking funds is their low fees. As the index is mimicked, fewer trades result in lower transaction fees.
The manager is also not required to use expertise to analyse and identify undervalued stocks.
Instead, they only seek to hold the same constituents at the same or similar weightings as its tracked index.
Getting exposure to S&P 500 index-tracking funds
There are different ways in which South African investors could gain exposure to the S&P 500 and other international index-tracking funds.
The first is by using local index-tracking feeder funds, which are rand-denominated funds that feed into an offshore master fund.
These funds give investors offshore exposure without requiring currency conversions or SARS clearance.
The Satrix S&P 500 ETF is an example of such a fund, and has a total expense ratio of 0.25% per annum.
Another option is to invest directly in an offshore index tracker.
This option would require local currency to be converted to foreign currency, which may require SARS clearance if the investment is above the R1 million discretionary allowance.
This option has the benefit of gaining access to extremely low-fee funds and not being taxed on the currency gains of the initial investment.
The Vanguard S&P 500 ETF is an example of such a fund with a total expense ratio of 0.03% per annum.
Satrix S&P 500 ETF versus Vanguard S&P 500 ETF
To analyse the impact of the different fee structures, Daily Investor compared the return achieved through the Satrix S&P 500 ETF versus Vanguard S&P 500 ETF.
We considered a R1 million investment over 10 and 20 years and took the USD to ZAR conversion into account.
A real-world example of a trade that occurred on 29 November 2022 showed that the investor paid R17.1836 per USD when the spot rate was 16.9950 per USD.
The investor, therefore, received $58,195 to invest instead of R1 million. It was equivalent to R978,187.18.
We then assumed the transaction fees were similar on both trades, and the other R1 million would remain unchanged when invested in the Satrix ETF.
The spread on the currency conversion would therefore create a R21,813 difference in the two strategies.
Over a 10-year period, from 2013 to 2023, the difference in fees would close the gap from R21,813 to only R134, making the Satrix strategy the preferred option for any period below ten years.
However, extending the investment horizon to 20 years, the difference in fees creates a greater difference between the two strategies.
The lower fees from the Vanguard ETF saw it outperforming the Satrix ETF by R90,389, making the Vanguard option the preferred strategy in the long term.
This example shows that the small setback caused by the currency conversion took more than 10 years to recover through lower international fees.
It makes the local feeder fund option an attractive alternative to investors seeking offshore exposure and protecting against a weakening of the rand.
It should be noted that this example did not take taxation into account, which can make the local feeder fund less attractive.
It also did not take the loss when converting foreign currency back to local currency at the end of the investment into account.
Satrix S&P 500 vs Vanguard S&P 500 over 10 years
|Satrix ending value
|Vanguard ending value
Satrix S&P 500 vs Vanguard S&P 500 over 20 years
|Satrix ending value
|Vanguard ending value