‘Transaction fee’

Shocking_Blue

Hi all,

Considering one of the two following:

HSBC FTSE 250 Index Accumulation C

Vanguard FTSE 250 UCITS ETF | VMID

Just had a a couple of queries re ‘transaction fee’. For the VMID there isn’t any showing (just OGC), but for HSBC there is.

-          Is it the case that there will be no transaction fee for VMID (just OGC)?

-          What exactly is a transaction fee? Is it something that’s charged on buying and selling in and out of the fund, or is it some sort of annual charge etc?

Thanks in advance.

NottinghamKnight

What platform are you on?

VXman

Shocking_Blue said:

Hi all,

Considering one of the two following:

HSBC FTSE 250 Index Accumulation C

Vanguard FTSE 250 UCITS ETF | VMID

Just had a a couple of queries re ‘transaction fee’. For the VMID there isn’t any showing (just OGC), but for HSBC there is.

-          Is it the case that there will be no transaction fee for VMID (just OGC)?

-          What exactly is a transaction fee? Is it something that’s charged on buying and selling in and out of the fund, or is it some sort of annual charge etc?

Thanks in advance.

If you buy direct through the Vanguard site they don't charge transaction fees on their own funds (well the ones I have anyway) just OGC. They call them entry and exit charges which I assume is the same as buying/selling charges but none are due on this product.

Just HSBC being more money grabbing?

eskbanker

Transaction fees are usually the internal costs of the fund administrators/managers buying and selling shares to keep such funds aligned with whatever they're tracking, as opposed to the dealing fees that are charged by the platform to the customer for buying or selling fund units.

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-250-ucits-etf-gbp-distributing/cost-minimums

Transaction costs also apply and are incurred when the fund buys or sells holdings.

bowlhead99

eskbanker said:

Transaction fees are usually the internal costs of the fund administrators/managers buying and selling shares to keep such funds aligned with whatever they're tracking, as opposed to the dealing fees that are charged by the platform to the customer for buying or selling fund units.

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-250-ucits-etf-gbp-distributing/cost-minimums

Transaction costs also apply and are incurred when the fund buys or sells holdings.

Yes, while a platform can charge you a fee per transaction (each order you place) or an open ended investment fund can charge you a fee for entry or exit, the 'transaction fees' terminology here will relate to costs that the fund incurs when buying or selling. For example a brokerage fee for placing a trade on a stock exchange to buy shares in company X, or stamp duty when it buys some more shares of company Y.  You don't pay those costs directly yourself, but they're a cost to which you are exposed when you own a fund that incurs them.  

The fund doesn't include them in its declared OCF because they are not ongoing charges in its profit and loss account - they get capitalised as part of the cost of investment. For example they spend £1000 buying some shares and pay £5 stamp duty and £1 broker fee and the investment has cost them £1006. Later in the year when they sell the holding (to rebalance with the index quarterly or simply because an investor wants his money back so they need to get hold of cash by selling some stuff) or simply revalue it at a reporting date, they might have £1020 of value for something that cost them £1006. And then when they sell it they only get £1019 after paying another broker fee. 

The £13 profit between the £1006 purchase cost and the £1019 sale proceeds is recognised within the fund's total return and NAV performance for the year etc, but it would have been £20 profits if the transaction costs hadn't existed.  In the interests of transparency, the FCA tells authorised open-ended funds to disclose an estimate of transactions costs because the profit would have been £20 if the fund had found a way of making the gain without incurring such costs. But some of the methods that can be used to come up with the estimates of transaction charges, are a bit dubious and inconsistent between funds and managers.

 VMID is an ETF rather than an FCA regulated collective scheme like an OEIC or authorised unit trust, and on its key investor information document in the charges section they simply say 'Portfolio transaction costs will have an impact on performance' and 'The ongoing charges figure is based on expenses for the year ended 31 December 2019. This figure may vary from year to year. It excludes portfolio transaction costs', but they don't try to disclose the transaction costs in that document. Generally you wouldn't expect it to be very high on an index fund (as such funds have relatively low levels of portfolio churn and only incur high transaction costs when they are growing rapidly (in such cases, they may introduce dilution levies or the like).  If transaction fees were really high, you would probably see a different in total return between that fund and a rival unless they both had terrible tracking error and were hard to compare. 

dunstonh

If you buy direct through the Vanguard site they don't charge transaction fees on their own funds (well the ones I have anyway) just OGC.

All the Vanguard funds have transaction charges.  Indeed, all funds have transaction charges.  The transaction charges for a fund are the same irrespective of the platform you hold it on.   However, some platforms do not disclose the transaction charges clearly whilst others do.   All platforms should show the information.  Some just hide it away or show it in a different way that allows them to comply with the barest minimum standards.

Just HSBC being more money grabbing?

No.   Just a failure to understand the charges you are paying.

Is it the case that there will be no transaction fee for VMID (just OGC)?

The TC on the HSBC fund is 0.32%  (that is high for TC).  On the Vanguard fund it is 0.17%

What exactly is a transaction fee? Is it something that’s charged on buying and selling in and out of the fund, or is it some sort of annual charge etc?

It is charges within the fund that you do not explicitly pay but the fund pays (and impacts on the return).  The total charges of the internal costs are then pro-rata'd to be shown how much they impact on the investor.

TC can be confusing if you dont understand it as some funds will have higher TCs due to their very nature.  For example, a property fund will have building maintenance to pay for.   That falls under the TC.    A specialist fund investing in start ups will cost out the support they give the business and show that in the TC.   Most people ignore the TC.  

Shocking_Blue

bowlhead99 said:

eskbanker said:

Transaction fees are usually the internal costs of the fund administrators/managers buying and selling shares to keep such funds aligned with whatever they're tracking, as opposed to the dealing fees that are charged by the platform to the customer for buying or selling fund units.

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-250-ucits-etf-gbp-distributing/cost-minimums

Transaction costs also apply and are incurred when the fund buys or sells holdings.

 If transaction fees were really high, you would probably see a different in total return between that fund and a rival unless they both had terrible tracking error and were hard to compare. 

Many thanks. So the figures shown as total returns on sites such as Morning Star are net of/after the deduction of transaction fees?

Another_Saver

Shocking_Blue said:

bowlhead99 said:

eskbanker said:

Transaction fees are usually the internal costs of the fund administrators/managers buying and selling shares to keep such funds aligned with whatever they're tracking, as opposed to the dealing fees that are charged by the platform to the customer for buying or selling fund units.

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-250-ucits-etf-gbp-distributing/cost-minimums

Transaction costs also apply and are incurred when the fund buys or sells holdings.

 If transaction fees were really high, you would probably see a different in total return between that fund and a rival unless they both had terrible tracking error and were hard to compare. 

Many thanks. So the figures shown as total returns on sites such as Morning Star are net of/after the deduction of transaction fees?

Performance figures are the fund's performance figures so include the effects of transaction fees because those are within the fund. Platform and dealing fees are external so are not included because they are not part of the fund's performance.
VMID's transaction fees are surprisingly high for an index fund. Part of this is because as a mid cap fund it has both a top at which co's swap into FTSE 100 and a bottom at which xo'y swap into the FTSE small cap, also the 250 experiences a lot of acquisitions of co's within the index from outside, which is why it has outperformed by so much for so long.

bowlhead99

Shocking_Blue said:

bowlhead99 said:

eskbanker said:

Transaction fees are usually the internal costs of the fund administrators/managers buying and selling shares to keep such funds aligned with whatever they're tracking, as opposed to the dealing fees that are charged by the platform to the customer for buying or selling fund units.

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-250-ucits-etf-gbp-distributing/cost-minimums

Transaction costs also apply and are incurred when the fund buys or sells holdings.

 If transaction fees were really high, you would probably see a different in total return between that fund and a rival unless they both had terrible tracking error and were hard to compare. 

Many thanks. So the figures shown as total returns on sites such as Morning Star are net of/after the deduction of transaction fees?

Yes - all total return figures are going to reflect what a holding in the fund was worth at the start and end of the period, dividends reinvested. If cash leaked out to high transaction costs or high management fees or performance fees or legal costs or whatever, the cash won't be there at the end of the period (or the cash will be there but invoices will be payable) so the fund's net assets will be lower than if the costs had not existed. If a fund has a good gross performance but high costs (whether management fee, other ongoing costs, transaction cost exposure, whatever) it may end up with a worse net performance than if it had had slightly lower gross performance but lower costs.   The NAV total return doesn't give any hiding places to brush expenses under the carpet - they all hit the bottom line.

The only sort of cost exposure an investor may have that wouldn't be captured on a NAV or total return chart would be an explicit entry fee or exit fee or dilution levy - because when putting total return into a chart or a table of figures, you're assuming the investor owned the fund at both the beginning and end of the period.  

Obviously this excludes platform fee because investors make their own choice what broker or platform they want to use to get access to the fund. 

Shocking_Blue

Another_Saver said:

Shocking_Blue said:

bowlhead99 said:

eskbanker said:

Transaction fees are usually the internal costs of the fund administrators/managers buying and selling shares to keep such funds aligned with whatever they're tracking, as opposed to the dealing fees that are charged by the platform to the customer for buying or selling fund units.

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-250-ucits-etf-gbp-distributing/cost-minimums

Transaction costs also apply and are incurred when the fund buys or sells holdings.

 If transaction fees were really high, you would probably see a different in total return between that fund and a rival unless they both had terrible tracking error and were hard to compare. 

Many thanks. So the figures shown as total returns on sites such as Morning Star are net of/after the deduction of transaction fees?

VMID's transaction fees are surprisingly high for an index fund. Part of this is because as a mid cap fund it has both a top at which co's swap into FTSE 100 and a bottom at which xo'y swap into the FTSE small cap, also the 250 experiences a lot of acquisitions of co's within the index from outside, which is why it has outperformed by so much for so long.

Thanks. I know it's not the same thing (other than focusing on mid-cap, albeit growth focused rather than more balanced), but, having had these well-informed explanations of TCs I'm edging towards: 

ASI UK Mid-Cap Equity Fund I Acc

The performance is noticeably better than either HSBC or Vanguard, even after TCs, from what I can gather from MorningStar. It's only a satellite fund, so I guess a riskier growth-focused fund would be ok.

Another_Saver

Shocking_Blue said:

Another_Saver said:

Shocking_Blue said:

bowlhead99 said:

eskbanker said:

Transaction fees are usually the internal costs of the fund administrators/managers buying and selling shares to keep such funds aligned with whatever they're tracking, as opposed to the dealing fees that are charged by the platform to the customer for buying or selling fund units.

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-250-ucits-etf-gbp-distributing/cost-minimums

Transaction costs also apply and are incurred when the fund buys or sells holdings.

 If transaction fees were really high, you would probably see a different in total return between that fund and a rival unless they both had terrible tracking error and were hard to compare. 

Many thanks. So the figures shown as total returns on sites such as Morning Star are net of/after the deduction of transaction fees?

VMID's transaction fees are surprisingly high for an index fund. Part of this is because as a mid cap fund it has both a top at which co's swap into FTSE 100 and a bottom at which xo'y swap into the FTSE small cap, also the 250 experiences a lot of acquisitions of co's within the index from outside, which is why it has outperformed by so much for so long.

Thanks. I know it's not the same thing (other than focusing on mid-cap, albeit growth focused rather than more balanced), but, having had these well-informed explanations of TCs I'm edging towards: 

ASI UK Mid-Cap Equity Fund I Acc

The performance is noticeably better than either HSBC or Vanguard, even after TCs, from what I can gather from MorningStar. It's only a satellite fund, so I guess a riskier growth-focused fund would be ok.

To say the performance "is better" is a misnomer, it has been better. With the more focused funds in smaller corners of the market, the usual principles about indexing beating everything over the long term don't apply as strongly. Whereas with the FTSE 250, the reasons for very strong performance are less clear cut. For one thing, it is possible that the quarterly reshuffle works to its advantage. From my own working out the main cause has been then high rate of acquisitions of co's in the index from outside the index, the profit from these has added just under 3% to the return since 1992, which fully accounts for the outperformance over the FTSE 100.