Regular reader Benjamin writes:
Myself and my partner are starting to invest in ETF’s.
What a great idea Benjamin!
What we can’t work out is how to keep adding to our purchased shares on a regular basis without paying a lot in broker fees?
We started with a $10,000 investment via NABtrade and set up dividend reinvestment, but we also want to set aside say $200 a fortnight from our pay for further investment.
Can you invest extra every fortnight or does that incur the brokerage fee every time?
First of all, good on ya Benjamin for diving in and getting started with Australian ETF Investing. This will be one of the best decisions you have made in terms of securing your financial future for you and your partner.
I see you already have $10,000 invested in ETF’s of your choice which is a great amount for a first investment – well done!
You know the process of buying and selling ETFs through a broker and you have figured out how to enroll in the dividend reinvestment plan!
Minimising Broker Fees
There are two ways to minimise fees when buying ETF’s:
- Enrol in the Dividend Reinvestment Program so that the ETF provider will reinvest your dividends and buy more shares for you for free
- Save up a large chunk of dollars before buying your next set of ETF shares because the more you invest the less you pay in broker fees
Benjamin already the first strategy under control so let’s talk about the second strategy.
Minimising Fees with NABTrade
Here are the fees that NABTrade charges for buying and selling ETFs.
- $14.95 on trades up to $5,000
- $19.95 on trades between $5,000.01 and $20,000
- 0.11% of trade value on trade above $20,000.01
Let’s look at these fees in % terms of different investment amounts.
- Trade size = $200. Broker costs = $14.95/$200 = 7.48%
- Trade size = $1,000. Broker costs = $14.95/$1,000 = 1.50%
- Trade size = $5,000. Broker costs = $14.95/$5,000 = 0.30%
- Trade size = $10,000. Broker costs = $19.95/$10,000 = 0.20%
- Trade size = $20,000. Broker costs = $19.95/$20,000 = 0.10%
If you are making trades valued above $20,000 then the calculations changes to be a fixed per cent of the amount invested.
- Trade size = $50,000. Broker costs = 0.11% * $50,000 = $55
Analysing these numbers you can see that it doesn’t make much sense to buy regular packages of $200 worth of shares. If you do that NAB will charge you $14.95 for each trade. That works out to be 7.48% of the amount you are investing!
You need to be earning a big return from your ETFs to overcome the brokerage costs here. A better strategy is to buy less frequently but in larger amounts.
If you can manage the amount you are investing you can even take advantage of sweet spots to minimise fees paid.
For example, it doesn’t make sense to buy $5,001 worth of shares and pay $19.95 when you could buy $4,999 worth of shares and pay only $14.95.
You should pay attention to these sweet spots because each broker has different thresholds where costs begin to increase.
Do you know your broker’s thresholds?
How often should I invest to minimise fees?
How regularly you should invest depends very much on how much you earn and how much you save each week.
Benjamin says and his partner are saving $200 per fortnight ($100 per week).
The first investment sweet spot with NABTrade is $5,000 . For any and all trades made that are worth less than $5,000 NAB will charge you $14.95. It doesn’t matter if you want to buy $200 worth of shares or $2,000. That will be $14.95 thanks!
To maximise the bang for your buck and minimise fees you want to save up as close to $5,000 as possible before buying an ETF and hit that sweet spot.
At $100 week this means that Benjamin should be buying an ETF once per year in order to minimise fees paid to NAB.
Let me anticipate your next question Benjamin
But what do I do with the $100 I am saving each week if I can only buy an ETF once per year?
You put it in your High Interest Savings Account Benjamin. And don’t be tempted to touch it throughout the year. Remember you are for your financial future – so show some restraint!
Got a question you want ETF Bloke to answer? Drop me a line
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