iShares funds price differential - I am perplexed

MancJonny

Can anyone tell me the reason for the price difference between the following 2 property funds?:

1. iShares Developed Markets Property Yield ETF GBPH DIST [DPYG] isin: IE00BDZVHC96 (OCF 0.64%);

2. iShares Global Property Securities Equity Index (UK) INC [ticker?] isin: GB00B8480097 [OCF 0.17%].

Apart from 1. above being an ETF (yet more expensive!), the 2 funds are virtually identical in size, benchmark followed, product structure, sector / geography / holdings data, and so on.

So why the big price difference?

TemporaryUsernameMay2020

DPYG is a currency-hedged version of (1). The unhedged version, IWDP, is marginally cheaper, at 0.59% OCF.

That's iShares pricing: some products are very competitively priced, others are a money-spinner for iShares.

Why don't people switch from the ETF to the cheaper fund? Perhaps they are not based in the UK, and don't have access to UK-based funds. This ETF, like many others, is traded on stock exchanges in multiple countries.

Perhaps they want the instant trading you get with an ETF. There are comparable ETFs from competitors, with a somewhat lower OCF of 0.4% (viz. HPRO and GBRE), but they are smaller and appear to have bigger bid-offer spreads.

There is more competitive pricing among comparable funds: L&G Global Real Estate Dividend Index (Class I) has an OCF of 0.2%.

bowlhead99

MancJonny said:

Can anyone tell me the reason for the price difference between the following 2 property funds?:
the 2 funds are virtually identical in size, benchmark followed, product structure, sector / geography / holdings data, and so on.

The poster above seems to have it covered but for some more detail:

The funds are not identical in benchmark or in 'product structure' (the later being evident from the fact the first is an ETF and the second is an open ended fund that must be held through an intermediary fund platform)

a) Your #2 option follows the FTSE EPRA NAREIT Developed index while #1 follows the FTSE EPRA NAREIT Developed Dividend+ index, which is a more selective index that holds about 10% fewer stocks (those ones which have a 1yr forecast dividend yield of 2% or more). Products with more strict selection criteria can involve more monitoring and adjustment.

b) Your #1 option, 'DPYG' is a GBP-hedged share class which will produce quite a different result to the (larger and cheaper) USD share class of the same ETF, 'IWDP'.  Although OCF of the unhedged variant is only a bit cheaper (0.59% OCF instead of the 0.64% of the one you pointed us to), it is clearly less efficient to offer a small niche share class.

You should consider whether you want hedging or not, because if GBP weakens by 20% and the hedge works, the unhedged version of the fund would appreciate in value by a quarter (because e.g. a pound is now only worth 80% of the dollars it used to be worth, and there are still roughly the same number of dollars of NAV, so each $100 of NAV is now worth 25% more pounds), whereas the hedged version should more closely track the foreign holdings' underlying performance without the effect of that currency movement, so if the dollar NAV changed by 0% you would get no return, even though the people who didn't hedge would  have found their £80 turned into £100. Of course, the hedge could be a point of potential failure as there is more to go wrong if the ETF enters into contracts to hedge the performance and the normal index fund does not.

The 'full retail price' version of the #2 open ended fund (e.g. class A) for direct investors is 0.50%, although you won't pay that through a platform, you'd buy class D or H which is more the 0.16-0.2% range like the one you linked, where the intermediary handles all the customer work.  But aside from what it costs to put a product together (and it's true that ETFs can be more expensive than the equivalent open-ended funds through intermediaries sometimes), the price of products depends on their marketing and what their competition is doing.

For example in the ETF space, the competitors are not particularly cheap - for example Lyxor's FTSE EPRA NAREIT Developed ETF costs 0.45% and doesn't trade in London so you'd have to buy it on Euronext ; HSBCs does but it costs 0.4% and is only $150m in size, while Amundi's is 0.24% but at $500m is still only a quarter of the size of iShares's product, so may have worse liquidity creating larger bid-offer spreads, and none of them are doing the 'dividend plus' version of the index, or offering hedged share classes etc. 

So iShares will think to themselves, we have been running this ETF for longer than any of those rivals and have over $2bn under management in ours, clearly there is a demand for what we are selling at 0.6%, why would we want to drop the fees on it?

Whereas in the open ended funds space in the UK their tracker is competing with loads of managed UK and international managed unit trusts and PAIFs, having launched in 2010 shortly after the last financial crash, and was looking to convert people to taking global exposure to property via trackers, from a community of investors that previously did not really use trackers for real estate because the products didn't exist. So they have been looking to reduce fees over time (of course, the fees do not look through to the underlying costs of the REITs that they track, which are another layer of fees for investors to bear) and they have realised that in that particular competitive space, it's important for them to be as low cost as possible when they are in competition with established direct property fund managers who will be spending a lot of time and expense making decisions on commercial property purchases and charging high OCFs for them.

So ultimately the OCFs for these two funds that you highlighted, which each track a different index using a different structure and operate in a different competitive environment, have evolved to be different from each other.

MancJonny

I am very grateful for the 2 speedy & knowledgeable replies above.  That'll teach me to throw the phrase "virtually identical" around when discussing finances!

On a first reading, I can follow about two-thirds of what bowlhead99 is saying and I will go over it repeatedly and very carefully - as well as looking at the other options both contributors mentioned.

However, given my relative paucity of knowledge a propos the nitty-gritty details of funds / ETFs, it will still be a challenge to select the fund which I want - i.e. the one with the best bang-for-the-buck.

bowlhead99

MancJonny said:

However, given my relative paucity of knowledge a propos the nitty-gritty details of funds / ETFs, it will still be a challenge to select the fund which I want - i.e. the one with the best bang-for-the-buck.

FWIW my dad has a few percent of his ISA portfolio in fund #2. It's not his only property exposure and my mum uses something different.  An index fund such as that doesn't seem a particularly bad or expensive fund to have some of your money in, if what you want is to have 20-25% of your money in ten big (mostly US-focused) REITs, another 10-15% in the next ten biggest, and the other two thirds of your money spread over a few hundred smaller ones around the world. The tracking error is not perfect and it has lagged its benchmark a bit more than the OCF would imply.

Of course, REIT values are driven by supply and demand for the companies themselves as much as by supply and demand for the underlying property investments they hold (which in some cases will be leveraged with borrowings to a greater or lesser extent), so the price can be volatile - it's down 21% since Christmas eve, but had been down 28% since that point when I happened to last look in on it about 6 weeks ago. And who wants to buy commercial property when the tenants all over the world can't pay their rent and valuers have nothing to go on but the notion that at some point, people will be allowed to go shopping and to offices again? 

MancJonny

bowlhead99 said:

And who wants to buy commercial property when the tenants all over the world can't pay their rent and valuers have nothing to go on but the notion that at some point, people will be allowed to go shopping and to offices again? 

But would that not be a good reason for a patient fund investor precisely, if cautiously, to allocate some resources to such funds at this time?

The market may be near rock-bottom now for such investments (and for a lot of others, too, of course), but can only ("at some point", as you say) pick-up again after the worst effects of the Covid-19 pandemic have passed? Unless the pestilence has, once and for always, utterly ruined the market for commercial property?

dunstonh

Most UK consumers buy UT/OEICs. Not ETFs. 

The extra knowledge required when buying ETFs puts many off.  Post 2013, the cost differences in bundled and unbundled investments went away as OEICs/UTs went unbundled.    So, the old "ETFs are cheaper" reason just isn't there any more.  Plus, many do not like the fact you do not get FSCS protection on ETFs but do on OEICs. 

The UT/OEIC tracker market has had some competition in recent years and that has driven the charges down.   That price sensitivity is less prevalent in the ETF market as most retail consumers who are price sensitive don't buy ETFs.

bargainhunter888

dunstonh said:

Most UK consumers buy UT/OEICs. Not ETFs. 

The extra knowledge required when buying ETFs puts many off.  Post 2013, the cost differences in bundled and unbundled investments went away as OEICs/UTs went unbundled.    So, the old "ETFs are cheaper" reason just isn't there any more.  Plus, many do not like the fact you do not get FSCS protection on ETFs but do on OEICs. 

The UT/OEIC tracker market has had some competition in recent years and that has driven the charges down.   That price sensitivity is less prevalent in the ETF market as most retail consumers who are price sensitive don't buy ETFs.

why is it that its always mentioned that extra knowledge is required? reading sites like justETF, they are describing them just like a fund, but can be traded on the stock exchange and can be bought and sold throughout the day, rather than Funds which are priced just one? am i missing something?

dunstonh

why is it that its always mentioned that extra knowledge is required?

Because there are greater risks to be aware of and different things to consider compared to an OEIC/UT.

Remember that most people in the UK have an experience of life funds, pension funds and UT/OEICs.  All pretty similar and relatively simple to understand.     So, moving to an ETF without understanding the extra issues you need to be aware of and research is risky.

This does not mean that they are not suitable for the right person.  Far from it.  However, if you don't know the different issues that exist which create additional risk then you should not be using them.

MancJonny

dunstonh said:

why is it that its always mentioned that extra knowledge is required?

Because there are greater risks to be aware of and different things to consider compared to an OEIC/UT.

Remember that most people in the UK have an experience of life funds, pension funds and UT/OEICs.  All pretty similar and relatively simple to understand.     So, moving to an ETF without understanding the extra issues you need to be aware of and research is risky.

This does not mean that they are not suitable for the right person.  Far from it.  However, if you don't know the different issues that exist which create additional risk then you should not be using them.

I don't doubt for a second that that is true; but it is a counsel of perfection.

I would be willing to bet that if the average punter waited until he understood "the different issues that exist which create additional risk" amongst different investment products, he would never get around to investing in pretty much anything at all.