The 0.00% MER ETF Revisited

Last year I had written about an ETF that had a management fee of 0.00% and an MER of 0.00%. Click here to read the original post.

Time to Re-visit

We’re coming up to two years of data on the db x-trackers EURO STOXX┬« 50 ETF and I thought it might be nice to check up on it. After *almost* two years, there has been an annualized lag of 67bps (that’s 0.67%). In and of itself, that number doesn’t tell us enough. If a fund is very small, tracking error is expected to be higher. If the underlying stocks are volatile, tracking error is expected to be higher – especially in a whipsawing market. If the underlying constituents are illiquid, tracking error is expected to be higher. If there are stamp fees to be paid, again – tracking error is expected to increase.

So how does 67bps stack up after taking these facts into consideration?

Well, the Euro STOXX 50 are the most liquid stocks in Europe. The fund has $2 billion in assets and is interlisted on six exchanges. So I don’t expect liquidity is an issue, nor is the size of the fund. The market has been nuts, so that’s something to consider. Then there is the magnitude of the tracking error. 0.67% is a big deal when your index has returned 1 or 2%, but in this case the index had an annualized return of -17.53%. So that may be a contributing factor as well. I have no idea how much stamp fees have been paid.

Not Adding Up

The other consideration is the db x-trackers are not your ordinary ETFs. They are swap-based, and are designed to reduce tracking error by offloading the tracking error risk to a counterparty. Further, the gross operating costs of 0.15% are expected to be offset by revenue from security lending. In fact, there are hints that this ETF is expected to slightly outperform its benchmark index over time.

Well, after two years it hasn’t done that. I’ll put in a call to Germany to try and track down some answers. On a side-note, if you go up a layer, the parent fund is domiciled in Luxembourg and I’ve been chatting with the Secretary General of Luxumboug for Finance about all the interesting things that seem to happen in Luxembourg – look for that interview in the next few weeks on the podcasts…

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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