As competition among domestic asset management firms intensifies, they are cutting exchange-traded fund (ETF) fee rates one after another. But the expense borne by investors is not limited to the management fee. It turns out that one out of every five ETFs incurs a "hidden expense" larger than the management fee.
As of Aug. 31, according to the Korea Financial Investment Association, the average total fee rate for domestic ETFs was 0.3084% per year. The total fee rate is the sum of an asset management company's management fee plus sales, custody, and administrative fees.
Although the word "total" makes it sound like everything, the actual expense borne by an ETF investor is higher. The overall expense includes the synthetic total expense ratio (TER), which is the total fee plus other expenses required to run the fund, such as index licensing fees and audit fees, and adds trading and brokerage commission rates. As of Aug. 31, the average overall expense was 0.4982% per year. That means the actual expense burden is about 1.6 times larger than the total fee rate.
Based on equity-type (including derivative- and mixed-type) ETFs, the total fee rate of Samsung Asset Management, which ranks No. 1 by market share, averages 0.3196% per year. However, the overall expense, including other expenses and trading and brokerage commission rates, averages 0.4833% per year. Mirae Asset Global Investments, No. 2 by market share, has an average total fee rate of 0.3655% per year, but its overall expense is 0.5491%.
Korea Investment Management and KB Asset Management, which are vying for the No. 3 spot by market share, showed a wider gap between total fees and overall expenses. Korea Investment Management's total fee rate averages 0.368% per year, similar to Mirae Asset Global Investments, but on an overall expense basis it rises to 0.6134% per year. KB Asset Management's total fee rate averages 0.2918%, lower than other managers, but its overall expense is 0.5536%, exceeding Samsung and Mirae Asset Global Investments.
In 230 out of 1,016 ETFs (22.6%), the sum of other expenses and trading and brokerage commission rates was higher than the total fee rate. This means the hidden expense exceeds the total fee that asset managers emphasize. KB Asset Management had the most with 51, followed by Samsung Asset Management with 36, Mirae Asset Global Investments with 34, and Korea Investment Management with 27.
Trading and brokerage commission rates tend to be higher for ETFs with active transactions. Even narrowing the scope to ETFs where other expenses exceed the total fee rate, there were 125 out of 1,016 (12.3%). KB Asset Management had the most with 37, followed by Kiwoom Asset Management with 17, Korea Investment Management with 15, and Samsung Asset Management with 13.
KB Asset Management's RISE China H Futures Inverse (H) is one example. This ETF inversely tracks the daily rise of the Hang Seng China Enterprises Index futures; its total fee rate is 0.59% per year, but other expenses are 0.75% per year.
Kiwoom Asset Management's KIWOOM U.S. ETF Industry STOXX showed an even bigger gap. This ETF invests in companies related to the U.S. ETF industry, such as BlackRock, S&P Global, and Moody's. Its total fee rate is 0.52% per year, but other expenses are double at 1.05% per year. Trading and brokerage commission rates also reach 1.713%.
Because the total fee rate promoted by asset management companies differs from what investors actually pay, the Financial Supervisory Service recently advised investors to check the exact expense. The Financial Supervisory Service especially noted that when investing in ETFs for the long term, investment expenses have a significant impact on returns, so investors should verify the overall expense.