Spanish Clark Kent is the Superman of Latin ETFs (part 7)

Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Colombia has been the cornerstone of ETF superhero Global X Funds’ success.  After leaving Madrid, surviving Wharton, and picking up a CFA on his way to co-founding Global X, CEO Bruno del Ama and his team currently oversee 31 ETFs which have brought USD 1.5 billion under management in less than five years.

[continued from part 6]

Nick Slepko:  How do Global X and the other ETF issuers make their money?

Bruno del Ama:  ETFs have the same legal structure as a mutual fund with some exemptions that allow them to be listed and traded on an exchange.  Like a mutual fund, they charge a management fee on the assets under management.  So, if you look at our Global X FTSE Norway 30 ETF (NYSEMKT: NORW), the management fee is 0.5% which means if you hold the Norway ETF, you’ll deduct 0.5% of your return over time and pay it to the asset manager.  If you only hold that security for a single day, the fee equates to 0.5% divided by 365.  The management fee is pro-rated to the investor holding period.

Slepko:  So are ETFs superior to mutual funds? 

del Ama:  They are for sure in one area, tax efficiency.  What happens with a mutual fund is that as an investor holds the fund, other investors may be selling their shares, and the mutual fund company has to sell securities to meet the redemption requests from these other investors, generating capital gains that create a tax impact for you, even though you did not sell your shares. In the case of most ETFs, the shares are created and redeemed in a process called “in-kind” which does not generate capital gains from other investors selling their shares. 

Other potential advantages of ETFs are generally lower fees, daily transparency of what the fund is holding (you can see the holdings of any of our funds at updated on a daily basis), and intra-day liquidity.  ETFs have the diversification advantage of mutual funds but also some of the advantages of regular stocks such as the ability to sell short, buy on margin, or use limit and stop orders.  Some ETFs also have options on them.

Slepko:  Let’s talk about fees and expenses because these always comes up when individual investors discuss ETFs.  What are the fees and expenses, and what is a reasonable amount/percent individuals should consider?

del Ama:  It depends on the market.  For example, we only bring products to market if no one else is providing one – the only exception being our Global X MLP ETF (NYSEMKT:MLPA).  Master limited partnerships are entities which provide access to energy infrastructure in the US (where we see a bull market for the next decade as a result of new technology in the natural gas industry).  There are a number of MLP exchange traded funds and notes out there in the market, and they all have 100% exposure to the US.  There are some complex tax issues with MLPs and when you invest in them you receive a K-1 tax form (which is fairly annoying for the average investor), but when it’s part of our ETF, we do all the tax work for shareholders and we incur that expense.  Other than that, everything else is US-based expenses.

If you look at existing MLP ETFs in the market, the average management fee is 0.84%, but in our opinion there’s no reason you should pay that much for that product.  That type of fee just doesn’t make sense to us, so we brought a product to market with the same exposure and a 0.45% management fee.  In our view, it’s a fair price for that type of exposure, the tax complexity, and that it’s all US-based securities.

On the other end of the spectrum is our most expensive product, the Global X FTSE Colombia 20 ETF (NYSEMKT: GXG) which has an expense ratio of 0.78%.  I think that price is also a fair price for Colombia for a number of reasons.  The cost of custody (holding securities) in Colombia alone is 0.33%, making it more expensive to invest locally than it is in a more developed market like the US.  [Only eight of the GXG holdings are accessible to retail investors via US exchanges, the remaining fifteen stocks, representing ~50% of the ETF’s net assets, are mostly traded locally on the Bolsa de Valores de Colombia.  The other Colombian ETF of note, Van Eck's Market Vectors Colombia ETF (NYSEMKT: COLX) has an expense ratio of 0.75% and 10 of its 26 stocks accounting for ~52% of the ETF are available to retail investors on US exchanges.]

Transaction expenses are also a factor, and if you try to buy local securities in Colombia you will find the execution costs in Colombia are very high.  Opening a local account in Colombia so you are ready to trade in the Colombian stock exchange is also complex.  Now, with our ETF we can come in with USD 200 million in assets in Colombia, so we can negotiate better prices with custodians and brokers and still be a great client given the size of our assets with those institutions.  

A lot of the clients investing in our fund are large, sophisticated institutional investors like mutual funds, hedge funds, and registered investment advisors.  The reason they choose to invest in Colombia through a vehicle that charges 0.78% is because it is more cost-effective for them as well, even though they have the ability and resources to open a local account and invest directly themselves. 

So, the answer is that it depends on the type of exposure you are getting.  A management fee of  0.78% for Colombia is very fair, but 0.78% for MLPs is not reasonable in our opinion.

 

 


Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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