Investors win out in race to the bottom

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Exchange traded funds - November 2014

So far this year, several well-known providers of exchange-traded fund (ETF) products have slashed their prices in what has been dubbed a ‘price war’ in the passive space.

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.

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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.”