[Practical Finance] 'Consider Transaction Costs Such as Management Fees and Futures Replacement Costs' Carefully

Gift-type involves replacement costs, while physical-type incurs storage costs affecting returns
Management fees and taxes should also be considered before investing

Commodity investment experts advise that when investing in commodity ETFs, investors should carefully consider transaction costs such as taxes and management fees to manage returns effectively. This is because taxes must be paid on capital gains or dividend income, and management fees and futures rollover (reinvestment) costs can erode returns.

Whether it is gold, crude oil, or minerals, once you have selected the individual commodity underlying the ETF you want to invest in, you should first examine the management fees. The total management fees for domestic commodity ETFs range from 35bp (1bp = 0.01%) to a maximum of 83bp. The total management fees include management fees, sales fees, custody fees, administrative fees, and brokerage fees.

Although the fees seem less than 1%, they cannot be ignored as the number of transactions increases. Among domestic commodity ETFs, Mirae Asset Global Investments’ ‘TIGER Guri Silmul’ has the highest fee at 83bp. Samsung Asset Management’s ‘KODEX WTI Crude Oil Futures (H)’ is relatively inexpensive at 35bp.

It is also problematic to insist on long-term investment just because the fees are high. For physical ETFs investing in actual commodities, storage costs are incurred. For futures ETFs, there are no storage costs, but replacement costs occur when rolling over from expiring futures to new futures.

In most cases, futures with longer maturities are more expensive. Selling near-month futures with little time left to maturity and buying far-month futures with longer maturities incurs costs equivalent to the price difference between the far-month and near-month futures. The longer the investment period, the more the futures rollover costs accumulate, negatively affecting returns.

Most domestically listed commodity ETFs are futures-based. Except for ‘ACE KRX Gold Spot’ by Korea Investment Management and ‘TIGER Guri Silmul’ by Mirae Asset Global Investments, all are futures ETFs. Therefore, it is more important to consider futures rollover costs rather than storage costs. Nam Yong-su, head of ETF management at Korea Investment Management, explained, "For futures ETFs, investors should be aware that rollover costs accumulate during long-term holding."

Taxes must also be considered when evaluating returns. If you are not subject to comprehensive financial income taxation for financial income exceeding 20 million KRW from interest and dividends, you must pay a 15.4% tax on dividend distributions or capital gains. Using tax-advantaged accounts such as Individual Savings Accounts (ISA) or pension accounts can reduce the tax burden.

Whether to hedge currency risk should also be considered. Fund managers operating commodity ETFs trade commodity futures in US dollars, so returns can vary depending on whether currency hedging is applied. If you are betting on the simultaneous rise of the dollar and commodity prices, choose an unhedged ETF; if you are purely targeting the rise in commodity prices, select an ETF with currency hedging.

After considering various costs and purchasing a commodity ETF, it is necessary to closely monitor the market. Fundamentally, commodities can be highly volatile due to supply and demand factors influenced by political, economic, and industrial variables. Especially, ETFs investing in a single commodity are likely to have higher volatility than those investing in multiple commodities.

Lee Su-jin, head of the ETF product team at KB Asset Management, said, "Crude oil prices move according to the political situation of oil-producing countries, metal prices are influenced by industrial demand and production issues, and agricultural products are affected by crop yields due to climate change and global food demand." She advised, "To respond to short-term market fluctuations, it is advisable to use futures ETFs, and for long-term strategies, invest in ETFs that hold portfolios of companies related to commodities."