No, the ETF owners are not ripping you off

Aug 03 2017 11:17
Simon Brown

Exchange-traded funds (ETFs) pay dividends all the time; some quarterly, some bi-annually. But in July when I tweeted about receiving my db X-tracker dividends, my Twitter followers went crazy, telling me about the fees and taxes that had been deducted.
The issue was that the dividend announcement had also included a detailed breakdown of the taxes and costs that are subtracted from the dividend. It seems that some brokers had, for the first time, put all the details into the cash statement on client accounts.
For many, this was the first time they’d seen a breakdown of these subtractions.
I am one of the few dividends nerds who always reads the Sens, so I knew what was being paid in taxes and fees.

But it seemed that many Twitter users had not noticed it before, with many making claims of fee gouging and massive fee increases.
Using the DBXWD* (which I will use as the example as it’s very popular and I hold it), the fee was about 24% of the dividend, with taxes making up another 16%. 

On the surface this may seem high, but no, this is not new. And Sygnia, as new owner of these ETFs, is not suddenly ripping off the ETF holder, as some people suggested.
Let’s dig into the details as published. The dividend was first declared in early July, but with the values in US dollars as that is the base currency of the ETF.

Sygnia then issued a Sens with currency conversion rates and rand details of the dividend.
Checking the Sens from 26 July 2017 we see the following declared:

- Gross foreign dividends of 33.791c (all figures in rand);
- Less: Foreign withholding tax of 5.49c;
- Plus: Foreign exchange gain of 0.038c;
- Plus: Equalisation of 0.405c;
- Less: Management fee of 8.114c;

So, the management fee of 8.114c equates to some 24% of the dividend.
Sure, 24% of the dividend in one half seems high, but as a percentage of the ETF price, which is trading at around 2 530c, it is some 0.32% of the ETF value.
Comparing that against just the dividend serves no purpose. We need to measure it against the cost of the ETF to find the actual total expense ratio (TER).

As a bi-annual fee we double it and this would then be a 0.64% TER. When I check the fact sheet as published on 30 June, Deutsche Bank claims a TER of 0.68%.

So, this 8.114c fee is actually slightly below the stated TER.
The point is that there is complete transparency. So, while we certainly do pay fees, they are neither excessive nor are they a secret.

And I very much do like the full breakdown as published on Sens.  

The other issue was the tax being paid. Unfortunately, this is a reality and we have to pay local and foreign tax on dividends, and locally that rate has increased to 20%.

You’ll note no local tax mentioned above but that is removed at the last step and is detailed on your cash statement with your broker.

That said, we can avoid the local tax payment of 20% by holding the ETFs in a tax-free account. That way, you will still pay some foreign tax but you will save on the local dividend withholding tax.

A very last point is that because fees are taken out of ETF dividends, typically ETF dividend yields are modest, often even for dividend-style ETFs such as property and high-yielding smart beta ETFs.

*The writer owns DBXWD.

This article originally appeared in the 10 August edition of finweekBuy and download the magazine here.

investment  |  etfs  |  fees