New Rating

Premier Pan European Property Share - New rating

Suspended

Edinburgh Worldwide - Rating suspended

New launch

F&C Global Real Estate Securities

New Rating

Henderson Asia Pacific Capital Growth - New rating

New Rating

Artemis European Opportunities - New rating

New Rating

Standard Life UK Equity Income Unconstrained - New rating

Rating downgraded

M&G Recovery - Downgraded

New Rating

Franklin UK Smaller Companies - New rating

New Rating

Investec UK Alpha - New rating

Rating upgraded

Jupiter Absolute Return - Rating upgraded

New Rating

Invesco PowerShares FTSE RAFI US 1000 - New rating

Rating downgraded

Invesco Perpetual Income and High Income - Downgraded

New Rating

Battle Against Cancer Investment Trust - New rating

New Rating

Foresight Solar Fund - New rating

New launch

Lindsell train global equity

New Rating

Aviva Investors US Equity Income Fund 2 - New rating

Rating downgraded

Aviva Investors US Equity Income - Downgraded

Rating downgraded

RENN Universal Growth - Downgraded

New launch

Fidelity global enhanced income

Rating downgraded

iShares S&P 500 ETF (Inc) - Downgraded

New Rating

Vanguard S&P 500 ETF - New rating

Suspended

Martin Currie North America - Rating suspended

Suspended

iShares S&P 500 ETF (Inc) - Rating suspended

New launch

Invesco perpetual global targeted returns

New Rating

Lazard Emerging Markets - New rating

New Rating

Old Mutual UK Alpha - New rating

New Rating

Cazenove UK Equity Income - New rating

Rating downgraded

Old Mutual UK Dynamic Equity - Downgraded

Rating downgraded

Franklin Mid Cap Fund - Downgraded

New Rating

AXA Framlington UK Mid Cap - New rating

New Rating

The Renewables Infrastructure Group (TRIG) - New rating

New Rating

BlackRock Frontiers Investment Trust - New rating

New Rating

Bluefield Solar Income - New rating

New Rating

GAM Star GAMCO US Equity - New rating

Rating upgraded

AXA US Short Duration High Yield - Rating upgraded

Rating downgraded

Jupiter Absolute Return - Downgraded

New Rating

Polar Capital Global Financials Trust - New rating

Suspended

Cazenove European - Rating suspended

New launch

Jupiter Global Equity Income

New Rating

Henderson European Focus - New rating

New Rating

Baring Europe Select - New rating

Rating downgraded

Neptune European Opportunities - Downgraded

Rating downgraded

JPM European Smaller Companies - Downgraded

New Rating

Morant Wright Nippon Yield - New rating

Rating downgraded

Blackrock UK Income - Downgraded

Rating downgraded

Fidelity UK Smaller Companies - Downgraded

Suspended

BlackRock UK Dynamic and UK Absolute Alpha - Rating suspended

New Rating

Greencoat UK Wind Investment Trust - New rating

Suspended

Schroder UK Alpha Plus and Schroder UK Growth IT - Rating suspended

New launch

TwentyFour Income fund

New Rating

Doric Nimrod Air Two - New rating

Rating downgraded

Aberdeen Emerging Markets - Rating downgraded

New Rating

Henderson Asian Growth Investment Trust - New rating

New Rating

Newton Higher Income - New rating

New Rating

Blackrock UK Income - New rating

New Rating

Threadneedle European Smaller Companies - New rating

New launch

JO Hambro CM Global Opportunities

Rating downgraded

iShares S&P 500 ETF (Inc) - Downgraded

Following a review of US equity ETF ratings, we have today downgraded iShares S&P 500 ETF (distributing shareclass, ticker IUSA) to a 1-star sell rating following the suspension of the rating earlier this week. Overall, we believe that this ETF is now far too expensive given the new competitive landscape, and the vast majority of investors will be better off in a replacement fund.

As well as qualitative considerations, the review included a detailed quantitative assessment of overall costs to investors, both within the fund (internal costs) and in terms of gaining access to the fund (external costs). Summary charts are below – many investors will be surprised by the actual level of costs within these funds, of which US withholding tax on dividends is a major contributory factor.

Overall, we believe that the pricing of the iShares S&P 500 ETF (distributing shareclass) is not competitive and not in the best interests of most investors. The total expense ratio (TER) reported by the group is 40 basis points (bp, one hundredth of a percent) compared to the market leaders on this measure whose charges are only 9bp. Our own cost estimation, shown below, shows the overall costs within the fund are broadly in line with these reported figures (45bp for iShares, 9bp for the market leaders) when excluding the effect of tax. However, these increase to 86bp and 50bp for iShares and Vanguard respectively when tax effects, which we consider a manifest cost to investors, are included.

At the same time, we show that the liquidity advantage that iShares has long enjoyed is coming under tight pressure from new entrants. According to the most recent data, the monthly average bid-offer spread for iShares was 6bp compared to the closest rival at 10bp. We believe this small gap will tighten even further moving forwards, and certainly does not justify the premium iShares are charging.

This fund is rated 1-star and we would suggest investors consider selling out of this fund. Investors may wish to consider investing instead in the Vanguard S&P 500 ETF, recently rated a 3-star buy by Bestinvest following the same review process, where we found the overall charges and bid-offer spread to be particularly attractive relative to the peer group.

Estimate of costs

Please see below our estimated internal and external costs. There has been much talk about the different factors that need to be accounted for when considering ETP costs, and the ‘Total Expense Ratios’ (TERs) reported by the ETP providers are just one factor to consider, albeit a major contributor.

Internal costs

We consider any systematic underperformance in the value of the fund relative to the index it is tracking to be a cost to the investor, and a cost that is internal to the fund (since it related to the underlying value of the fund). There is a complicating factor in the form of US withholding tax, which is an unavoidable tax charged on dividends for overseas investors and acts as a cost to the ETFs. We therefore present two charge estimates – the first (first chart below) includes the effect of this tax, and measures performance against the Total Return Index. For reference, we also show what the index return would be if the ‘standard’ 30% tax was applied (this is the S&P 500 NR index and is determined by the index provider, not Bestinvest). We believe this is a fair comparison, as this tax is a cost to the investor, even though the money goes to the US treasury.

We also present a second chart with an estimate of the effective cost accounting for a 15% tax rate, which, due to tax efficiencies, is the effective tax rate paid by these ETFs. We include the Total Return and ‘Net Return’ index for comparison, though readers should note the Net Return index uses the full 30% tax rate rather than the real 15%.

External costs

In the final chart we show the change in the bid-offer spread over time. This is the difference between the buying and selling price for an ETF and represents a cost when investors buy or sell shares. Note that it is not feasible to add in costs such as brokerage fees, as these will vary based on the sums involved and commercial interests of individual brokers.

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

This article is not a personal recommendation or advice to invest.