Do low bond yields mean ETF fee cuts?
Lyxor Asset Management’s decision to slash fees on its fixed income exchange-traded funds (ETFs) has prompted debate about whether price cuts could become more widespread at a time of low yields.
Earlier this month Lyxor announced it had cut fees on its ETFs, both in the corporate and sovereign bond space, in order to “improve value for fixed income investors”.
In a statement, the company noted: “To date, fixed income ETFs have been out of step with core equity exposures, with TERs typically in the region of 0.15 per cent for gilts, treasuries and corporate bonds.
“In a low-yield environment where, for example, two-year gilts yield less than 0.5 per cent, these costs significantly diminish an investor’s return.”
Fixed income products make up a quarter of Europe’s ETF market, according to Lyxor, but few others have backed the suggestion that low yields mean further price cuts in the space.
One ETF provider, which did not wish to be named, noted that the low-yield environment for core government bonds had already been in place for several years. Ten-year gilt yields, for example, have sat at or below 2 per cent for much of the past four years, with US Treasuries yielding less than 2.5 per cent over the same period.
Antoine Lesné, head of ETF sales strategy at SPDR, said lower bond yields were not in themselves a reason for fees to fall. He added: “Yield and fees are not mutually exclusive, but we do not believe that just because yields are lower, it has become less expensive to run funds. We understand the relationship and the objectives of being as close as reasonably possible to the index after fees. This is key to our investment process, and the TER among other elements will help reduce this impact, but it’s not the only part to the equation.”
Hector McNeil, co-chief executive at provider WisdomTree, noted that “beta-focused” ETFs had little space for differentiation based on performance. This, he said, could force the fees of such products down further as providers are forced to fight on cost.
“With beta-focused ETFs, it’s very difficult to differentiate and offer added value to investors over and above offering an efficiently run, low-cost ETF,” he explained. “Lowering fees seems to be a focus for beta providers as a result and has almost become a race to the bottom.”
Lyxor, whose cuts reduced total expense ratios (TERs) to 7 basis points on gilt and treasury ETFs and 9 basis points on its UK and US corporate bond ETFs, said its move was to protect investors in this area.
Others, such as Vanguard, said they would continue to make price cuts where possible, but emphasised this would not be confined to fixed income products.
A company spokesperson said: “Vanguard uses its global scale to leverage operating efficiencies and keep costs to a minimum for investors. As our assets under management increase globally, we can reduce expense ratios for the investors in our funds and give them a better chance of investment success.”
