Investors win out in race to the bottom

Earlier this year, Fidelity Worldwide Investment launched a range of tracker funds, including a UK fund with charges as low as 0.07 per cent.

In August, Vanguard announced it was lowering the charges on 25 mutual funds and ETFs, with prices on one of its products down to 0.07 per cent, in line with Fidelity’s offering. The charges on its ETFs now range from 0.07 per cent to 0.29 per cent.

State Street Global Advisors threw its hat into the ring in September this year when it revealed fee cuts of 20 per cent across its range of equity and fixed income ETFs.

Other ETF providers that have pledged lower fees in a race to the bottom include Deutsche Asset & Wealth Management, BlackRock and Source.

Simon Klein, Deutsche Asset & Wealth Management’s head of exchange-traded product sales, EMEA and Asia, says end investors are the big winners.

He observes: “There has been a raft of fee cuts from ETF providers in Europe this year, mainly on ETFs tracking the major developed market equity benchmarks. Several ETFs providing exposure to developed equity markets now come with all-in fees of less than 10 basis points per annum. This would have been unthinkable just a few years ago.”

Howie Li, co-head of Canvas, an ETF-based solution at ETF Securities, suggests the trend for lowering prices is among “plain vanilla ETFs” that track indices such as the FTSE 100 and S&P 500. “The industry, I think, will continue to see a price reduction in these plain vanilla products because investors are essentially looking for the cheapest way to access these passive indices,” he explains. “I don’t think this is exclusive to the ETF world. I think you are seeing price pressures on passive mutual funds as well.”

Mr Li notes that the ‘price war’ tends to involve larger-scale issuers. “My personal view is that they take this aggressive pricing strategy to bring assets in either at a loss or a very minimal profit in order to bring customers into the brand generally, and then look at cross-selling other products,” he adds.

However, Tim Huver, ETF manager for Vanguard in Europe, disputes the use of the term ‘price war’ to describe the continual lowering of charges.

“We certainly have seen prices come down in the industry over the past three years,” he says. “I know the term ‘price war’ gets thrown around a lot. We don’t see it as a price war because that seems to imply some sort of tactical strategy around pricing.

“Although it’s been very positive to see the industry as a whole lower prices – that has a positive outcome for the end investor – it’s not a tactical strategy, it’s just what we’ve been doing for over 30 years globally.”

Mr Huver also acknowledges that the Retail Distribution Review (RDR) has had a role in “focusing the mind on cost”.

Mr Li agrees it is investors who are the ultimate beneficiaries. He says: “The first way that investors are benefiting from this is that they can access these simple passive exposures at a low cost and that helps keep their portfolio costs down.

“The second part that benefits investors as part of these price pressures is that it forces the ETF industry to innovate to ensure any product they bring in in the future continues to add value.

“That actually means it will make it easier for investors to find products that suit them for their asset allocation.”

While the IMA is not able to capture the full ETF market in its data, in its latest annual report the organisation noted there is a greater use of passive management strategies in the UK and that this is putting increasing pressure on active managers. Certainly Mr Huver believes the industry’s slashing of costs will put pressure on the active space.

He explains: “We think that over the past five years, and even more recently this year, when you look at flows into passive products, it’s been very strong when compared to active products.

“So we may even be seeing a movement away from active over certain periods or even increasing popularity in passive products.

“That will ultimately force active managers to look at their range and also look at the costs associated with the range, because passive products do tend to be much less expensive.”

Ellie Duncan is deputy features editor at Investment Adviser

Expert view

Simon Klein, head of exchange-traded product sales, EMEA and Asia at Deutsche Asset & Wealth Management

There used to be an assumption that unlisted index funds and passive mandates in general charged lower fees than ETFs, but that is no longer the case. ETFs are now at least as competitive, if not more competitive, than index funds and mandates.

It is important for investors to get a sense of the total cost of ownership, and not just look at the all-in fee or total expense ratio.

ETF PROVIDER PROFILES: THE ONLY WAY IS DOWN

Vanguard Asset Management

Passive provider Vanguard announced lower charges on 25 funds in August this year. The ongoing charges for its ETFs range from 0.07 per cent to 0.29 per cent. Its S&P 500 Ucits ETF now has a charge of 0.07 per cent, down from 0.09 per cent.

iShares

In June this year iShares, the ETF business of BlackRock, cut the cost of a range of its ETFs, including several of its major equity ETFs. The iShares Core FTSE 100 Ucits ETF had its total expense ratio reduced from 15 basis points to 10 basis points. ETFs covering the US, Japan, Asia and Europe also saw fee reductions.

Deutsche Asset & Wealth Management

The firm launched a range of core ETFs in February 2014, which also involved cutting the fees on some already established ETF products. Most of the products in its core ETF range charge an annual all-in fee of 0.09 per cent per annum. Simon Klein confirms that those ETFs providing exposure to the FTSE 100, the Dax, the EuroStoxx 50 and the Nikkei 225 indices all have the nine basis point annual charge.