Fees: Not always a four-letter word
Fees are a necessary part of investing. There are a number of ways in which fees are charged, but not all of them are transparent. With XTBs the full fee is already incorporated into their price on ASX; there are no surprises.
What are the fees and costs for XTBs?
The fee for investing in XTBs is known as the ‘Securities Manager’s Margin’ (SMM). It is charged by the XTB manager (Australian Corporate Bond Company) and covers all relevant fees and costs involved in managing the XTB. This includes things like custodian fees, accounting fees, audit fees, ASX listing and CHESS fees and all other operational costs.
Fixed-Rate XTBs SMM
0.40% of the XTB Face Value multiplied by the number of years to the maturity date of the XTB.
Floating-Rate XTBs SMM
0.20% of the XTB Face Value multiplied by the number of years to the maturity date of the XTB.
Important distinction between XTB Face Value and Unit Price
XTB fees are charged on Face Value NOT Unit Price. The Face Value of all XTBs is $100. So, whether an XTB is trading at $101 or $120, the fee for two fixed-rate XTBs of equal maturity will be the same.
- YTMQF3 is a Fixed-Rate XTB with a Unit Price of $118.46 and a Face Value of $100 (14 AUG 2018)
- YTMQF3 matures on 19 MAY 2022
- The fee is 0.40% of $100 multiplied by the number of years to maturity (in this case 4 years)
- This fee is built into the $118.46 Unit Price investors see on ASX, before they decide to invest.
Note: Currently, most corporate bonds are trading at a premium to Face Value (above Face Value) because prevailing interest rates are lower than the coupon rate.
How are XTB fees deducted?
The Securities Manager’s Margin is not payable directly by individual investors. Due to the unique way that XTBs have been designed, the fee is included within the offer (or sell) price shown on ASX.
The XTB fee effectively lowers the yield of the XTB compared with the underlying bond.
A fixed-rate corporate bond trading in the wholesale market at a yield of 4.8%, effectively becomes a fixed-rate XTB trading on ASX at about 4.4%.
How is this different from most other investment products?
- Bond ETF and Managed Funds: Investment management fees for exchange-traded funds (ETFs) and managed funds are deducted by the ETF or fund company. Adjustments are made to the net asset value (NAV) of the fund on a daily basis.
- Bonds traded Over-the-Counter (OTC): OTC bonds can have very opaque fee structures. Some OTC brokers may even imply there are no fees associated with trading bonds with them. Instead they will incorporate their fee within the price they sell or buy from you. This amount may change on any day; it may vary depending on how much and how frequently you trade, or how well the broker has performed in any given period. In addition to the cost to buy and sell, OTC brokers often have a compulsory custody fee to hold your bonds. It is noteworthy that we do not charge custody fees for holding XTBs.
Why do XTB charge fees differently?
XTBs are a fixed income product. A core feature of fixed income is predictability. We believe fixed income investors should know exactly what income they will receive, when it will be paid and when their investment will mature.
By incorporating XTB fees within the initial purchase price, all coupon payments and the Face Value returned to investors can remain intact. We wanted to ensure that the experience for XTB investors was as close as possible to the experience for investors holding the underlying bond in the wholesale market.
A simpler way to consider an investment?
Two of our key brand values at XTB are certainty and transparency. Therefore, setting our fee by reference to the Face Value and incorporating it within the purchase price allows us to deliver on both attributes. Our aim is to leave you with a simpler choice – are you happy with the Yield to Maturity an XTB is offering on a particular day? If so, then by holding that XTB to maturity, you know the YTM you’ll receive, subject to no default from the issuer. There are no other fees to consider which will impact on your return, if you hold to maturity.
As with all ASX-traded products, investors will incur brokerage costs when buying and selling XTBs on the ASX. These fees vary, starting from around $15 per transaction.
One-way fees for buy-to-hold investors
Unlike most other ASX-traded products, XTBs have a maturity date. Following maturity, XTB holders receive the Face Value of $100 x the number of Units they held.
As a result, investors who buy and hold to maturity, only incur brokerage costs at the point of purchase. This is unlike bond ETFs or managed funds which are perpetual (they have no maturity date). For these investors, a second brokerage fee will be incurred to sell the ETF units. The requirement to sell, can also impact investment returns. With a perpetual fund, investors do not know what the price will be in the future. As a result, when investors want to sell, the ETF price may go in their favour, but it could go against them.
Performance before or after fees
Are you comparing apples with oranges? Many investors look at Yield to Maturity (YTM) when considering which fixed income product best meets their needs. Therefore, investors considering a bond ETF or Managed Fund against an XTB should understand that most ETFs and Managed Funds report YTM BEFORE fees. However, due to the transparency of our fees, XTB YTM is AFTER fees. So what you see on XTB performance reports is a true reflection of what an investor would receive.