db X-trackers improves fees transparency

We found that earlier this month, db X-trackers was stating a "maximum all-in fee" on some of its fund fact sheets, which in some cases, failed to include extra costs that make them more expensive than they appear.

To discover the true extent of these costs, investors would need to trawl their way through a 772 page prospectus, where a host of additional charges are buried.

Following criticism in January 2012, db X-trackers removed the term "maximum all-in" fee from most of its ETF factsheets, replacing it with a less-inclusive sounding "all-in" fee. But at least 10 of its funds retained the tag for an extra year and two months, before finally being dropped last week.

A spokesperson for db X-trackers said the only reason the "maximum all-in fee" was still appearing in the factsheets was because of an "administrative delay".

Gina Miller, founding partner at SCM Private which runs portfolios of ETFs including db X-trackers products and campaigns for 100 per cent transparency on charges, said: "We were unhappy with the term maximum all-in fee and thought db X-trackers was going to remove it a year ago. Deutsche Bank has been having a lot of administration issues as a result of its global rebrand."

Another fund that had, until this week, retained the "maximum all-in fee" label is db X-trackers' Equity Strategies Hedge Fund Index UCITS ETF (XHFE), which earlier this month Investors Chronicle noticed was poorly disclosing it fees. Its factsheet stated a "maximum all-in fee" of 0.9 per cent or 90 basis points (bp), which has now been changed to an "all-in" fee. But upon closer inspection, the hidden costs are significant.

Not included in the "maximum all-in fee" (or "all-in" fee) are an assortment of costs including custodian and account service fees (0.08 per cent), index fees paid to Deutsche Bank (0.15 per cent) and risk monitoring fees (0.5 per cent). On top of that, the hedge fund advisers are paid between 1 and 2 per cent with a 15 to 20 per cent performance fee on any profits.

At the time of the first report a spokesperson at db X-trackers said not all the costs involved are "appropriate" for inclusion in the fact sheet, and argued the fund's total cost of ownership is "in line" with other fund of hedge funds products.

Removing the word "maximum" makes db X-trackers ETF factsheets feel less opaque, but the description of the costs is the only thing that has changed. db X-trackers was quick to point out the meaning of "all-in fee" is identical to "maximum all-in fee", meaning it still only constitutes the fixed fee (custodian charges, transaction costs and listing fees) and the management company fee.

A wider problem persists

So although db X-trackers' factsheets are now more transparent, the problem of hidden fees persists. For example, db X-trackers FTSE Vietnam UCITS ETF's factsheet promises an "all-in" fee of 0.85bp. But in fact, there's an "index replication fee" of up to 43bp plonked on top of that. Again, this bulky cost is buried inside the lengthy prospectus so is not highlighted to investors.

ETFs remain among the cheapest investment products and not all include hidden fees, including many provided by db X-trackers. In fact, Investors Chronicle awarded db X-trackers three prizes at our recent fund awards for its FTSE 100 UCITS ETF, MSCI USA Index UCITS ETF, and CSI300 UCITS ETF. But both analysts and wealth advisers share concerns that hidden costs across the ETF industry are still too common, and too often exceed total expense ratios (TERs), rendering them meaningless as a measure of true fund fees.

Gary Reynolds, chief investment officer at Courtiers, said hidden charges are still a "huge problem" with ETFs and warned: "People who choose ETFs to invest are very concerned about cost, but they can easily be conned by providers. Unlike active funds where high and low TERs are generally good indicators of whether a fund is going to be cheap or expensive, an ETF's TER can often bear little relation to the true costs. But hidden costs will usually come out in the wash when you look closely at tracking difference."

Tracking difference looks at the overall difference between the ETF's performance and the performance of the index that it aims to replicate over a particular period. Charges will impact how closely the ETF matches the index.

db X-trackers ETFs that carried the "maximum all-in" fee label until last week