Looking To VGK And DBAP To Replace Higher-Cost Mutual Funds And Generate Income

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Includes: DBAP, FASQX, VGK
by: Fast Track to Financial Independence

Summary

My three remaining mutual funds charge high management fees that reduce my returns, and the lack of distributions undermines my income focus.

I decided to liquidate the mutual funds and transfer the capital into lower-fee ETFs with a similar investment focus that generate income.

I compare the mutual funds to two ETF substitutes, the Vanguard FTSE Europe ETF and the Deutsche X-trackers MSCI Asia Pacific ex Japan Hedged Equity ETF.

I am building a primarily dividend-income portfolio (details here), but my returns on part of the capital are undermined by high mutual fund management fees, and the lack of distributions by these funds is undercutting my income goals. So, I have decided to liquidate my three remaining mutual funds, which focus on Europe and Asia, and transfer most of the assets into lower-fee ETFs with a similar investment focus that generate income.

The three mutual funds are Ccr Croissance Europe R, Templeton Asian Growth Fund A, and Credit Suisse Equity Fund Small & Mid Cap Germany B. Two of these three are Europe-traded funds; the third, the Templeton fund, traded in a U.S. version (MUTF:FASQX) until its liquidation last year, but the European fund continues to operate. I list the key features of the three mutual funds in the following table. Please note that I was exempted from entry fees thanks to conditions negotiated by the online bank through which I accessed the funds, but the bank itself charges an annual platform fee of 0.75%.

Ccr Croissance Europe R CS Equity Fund Small & Mid Cap Germany B Templeton Asian Growth Fund A
ISIN FR0007016068 LU0052265898 LU0229940001
Benchmark Index

FTSE All World Europe

Midcap Market Index (NYSE:TR) MSCI All Country Asia ex-Japan Index
Top 10 holdings 30%
  1. Bayer AG (OTCPK:BAYRY)
  2. ING Groep N.V. (NYSE:ING)
  3. Prudential PLC (NYSE:PUK)
  4. SAP SE (OTCPK:SAPGF)
  5. Barclays PLC (NYSE:BCS)
  6. Johnson Matthey PLC (OTCPK:JMPLY)
  7. Pandora AS (OTCPK:PNDZY)
  8. Zodiac Aerospace (OTCPK:ZODFY)
  9. UniCredit SpA (OTCPK:UNCFY)
  10. Vodafone Group PLC (NASDAQ:VOD)
43%
  1. Airbus Group NV (OTCPK:EADSY)
  2. MorphoSys AG (OTCPK:MPSYY)
  3. Wirecard AG (OTCPK:WCAGY)
  4. Rheinmetall AG (OTCPK:RNMBY)
  5. Aixtron SE (OTCPK:AIXXF)
  6. Brenntag AG (OTCPK:BNTGY)
  7. United Internet AG (OTC:UDIRY)
  8. Fuchs Petrolub AG
  9. Deutsche Wohnen AG (OTCPK:DWHHF)
  10. GEA Group AG (OTCPK:GEAGY)
53%
  1. Siam Commercial Bank PLC (OTCPK:SMUUY)
  2. Tata Consultancy Services Ltd (OTCPK:TTNQY)
  3. Brilliance China Automotive Hld. (OTCPK:BCAUY)
  4. Kasikornbank Public Co Ltd Shs (OTCPK:KPCPY)
  5. Astra International Tbk
  6. Oil & Gas Development Co Ltd
  7. Ptt PLC
  8. Siam Cement PLC (OTCPK:SCVPY)
  9. China Merchants Bank Co. Cl. H
  10. Oil & Natural Gas Corp Ltd (OTCPK:OLNTY)
Concentrations Financials, consumer cyclical, basic materials, technology Industrials, consumer cyclical, healthcare, basic materials, technology. Financials, energy, consumer products, IT
Perf. 2014/Index +4.4% / +7.5% +0.3% / +4.4% +21.9% / +5.1%
Perf. 2013/Index +22.5% / +20.4% +39.5% / +40.3% -11.5% / +3.3%
Perf. 2012/Index +20.5% / +14.2% +33.1% /+31.3% +14.1% / +22.7%
Distribution Yield None None None
Entry fee 2.00% (max) 5.00% (max) 5.75% (max)
Management fee 2.12% 2.15% 2.22%
Bank fee 0.75% 0.75% 0.75%
Total fees (my case) 2.87% 2.90% 2.97%
Source : Key Investor Information Documents, available on Morningstar, Franklin Templeton, and MSCI.

To summarize, two of these funds have approximately equaled their benchmark indices in recent years, falling back notably last year, with the Templeton fund greatly lagging its index before a major come-back last year. All the funds have skimmed off about 3% in fees for this unremarkable performance. They also make no distributions, as dividends are reinvested. It is time to flip these funds into lower-fee ETFs with a similar investment focus that offer income, and I've identified two: the Vanguard FTSE Europe ETF (NYSEARCA:VGK) and the Deutsche X-trackers MSCI Asia Pacific ex Japan Hedged Equity ETF (NYSEARCA:DBAP). Here are the key features:

Vanguard FTSE Europe ETF Deutsche X-trackers MSCI Asia Pacific ex Japan Hedged Equity ETF
ISIN US9220428745 US2330518463
Benchmark Index

FTSE Developed Europe Index

MSCI Asia Pacific ex Japan US Dollar Hedged Index
Top 10 holdings

18%

  1. Nestle SA (OTCPK:NSRGY)
  2. Novartis AG (NYSE:NVS)
  3. Roche Holding AG (OTCQX:RHHBY)
  4. Royal Dutch Shell PLC Class A (NYSE:RDS.A)
  5. HSBC Holdings PLC (NYSE:HSBC)
  6. Bayer AG (OTCPK:BAYRY)
  7. BP PLC (NYSE:BP)
  8. Unilever (NYSE:UL)
  9. Sanofi (NYSE:SNY)
  10. GlaxoSmithKline PLC (NYSE:GSK)
23%
  1. Taiwan Semiconductor Manufacturing (NYSE:TSM)
  2. Samsung Electronics Co Ltd (OTC:SSNLF)
  3. Hon Hai Precision Ind Co Ltd ADR (OTCPK:HNHAY)
  4. Commonwealth Bank of Australia (CNWAY)
  5. China Mobile Ltd (NYSE:CHL)
  6. Westpac Banking Corp (NYSE:WBK)
  7. Tencent Holdings Ltd (OTCPK:TCEHY)
  8. BHP Billiton Ltd (NYSE:BHP)
  9. AIA Group Ltd (OTCPK:AAGIY)
  10. Australia and New Zealand Banking Group (OTCPK:ANZBY)
Concentrations Financials, healthcare, consumer defensive, industrials, consumer cyclical ; UK, France, Germany, Switzerland Financials, IT, consumer products, industrials, materials ; China, Australia, Korea, Hong Kong
Perf. 2014/Index -7.1% / +7.4 3.12% / 5.43%
Perf. 2013/Index +24.3% / +20.8% NA
Perf. 2012/Index +21.5% / +18.4% NA
Distribution Yield 3.25% 4.4%
Entry fee Broker commissions Broker commissions
Expense Ratio 0.12% 0.60%
Sources: FTSE, MSCI, Deutsche Asset and Wealth Management, EFT Database (eftdb.com).

The two ETFs each seem reasonably similar in sectoral focus to the mutual fund(s) to be replaced. VGK and the two Europe-focused mutual funds, with their whole-Europe and German concentrations, share an emphasis on financials, consumer products, healthcare and industrials, while DBAP and the Asian mutual fund both focus on financials and consumer products. DBAP places much greater emphasis on information technology, which I see as a positive. Both ETFs have one clear composition advantage over the mutual funds: they are far more diversified, with the top 10 holdings accounting for around 20% of assets, versus around 40% on average for the mutual funds. The ETFs are, predictably, much cheaper than the mutual funds in terms of fees, at 0.6% or less versus around 3% - a huge difference in the long term.

Looking at performance, VGK healthily outstripped its benchmark in 2012 and 2013, and its poor 2014 returns can presumably be attributed to the surging US dollar. It also did better than the whole-Europe mutual fund except for 2014, although the German mutual fund clearly beats it across the board, suggesting that I should conduct further research on a direct equivalent for that name. DBAP was somewhat behind its benchmark in 2014, the only full year for which data is available, although it outpaced it slightly in Q1 2015.

On distributions and income, the ETFs win by default, since the mutual funds reinvest dividends, and the ETF yields are impressive at 3.25% and 4.4%, respectively. That said, a glance at the distribution histories shows an erratic performance for VGK, and DBAP is a recent launch, so these numbers cannot be considered reliable, nor these ETFs in any way a substitute for high-yielding blue chips like AT&T (NYSE:T) or Bank of Nova Scotia (NYSE:BNS).

I regard these two ETFs as a good solution for generating income from the ex-mutual fund capital at vastly lower expense ratios, but I should remain on the look-out for other opportunities that offer more reliable dividend income and growth.

Disclosure: The author is long T, BNS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am likely to buy VGK and DBAP in the near future.

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