Passives steal a march on active as price war hots up

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Investing in ETFs and trackers

Passives steal a march on active as price war hots up

The growth of the passive investment industry is well established. In the UK, as elsewhere, the space has quickly grown out of being just a ‘style’, and has become a behemoth of its own: home to fierce competitive pressures, supply-side changes and product innovation.

The industry showed its strength in 2016 in what was the worst year for active fund inflows on record – tracker funds roped in assets and added 1 percentage point to their market share. 

Net inflows into tracker funds were £4.8bn last year, part of the total of net retail fund sales that only reached £6.8bn, according to the Investment Association. Add to this the €48bn (£43bn) of net inflows into European ETFs, and the industry stole a march on its active arch-rival.

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Progress has continued into 2017, although active funds have had a better time this year. At the end of July, overall fund sales had already surpassed annual figures for both 2016 and 2015 with tracker funds playing a part, bringing in £6.3bn out of a total of £23.1bn. 

Yet the rise of passives has introduced both positives and negatives for fund buyers and intermediaries.

The price war between passive providers has continued, with Fidelity recently sharing its lowest cost share class with external platform investors, bringing its UK tracker ongoing charges figure down to 0.06 per cent – a level matched only by BlackRock’s iShares brand.

Vanguard has also continued its policy of passing on economies of scale to investors by extending this to the multi-asset space. The firm cut charges on its LifeStrategy multi-asset brand in January as assets under management (AUM) reached £5bn. The move was an attempt to leapfrog BlackRock’s larger and cheaper multi-asset offering. Eight months later and assets in the Vanguard range total more than £8bn.

Charges in the vanilla ETF space also hover at low levels. Competition between providers has driven down fees, according to a recent Morningstar study of the European market. The research firm predicts prices are likely to “continue their race to the bottom”.

iShares and Vanguard are offering US equity ETFs for as low as 0.07 per cent, while UK exposure for between 0.07 and 0.09 per cent. Unlike the active space, the correlation between cost and assets remains strong, leading to iShares accounting for 46 per cent of the market at the end of 2016.

It was this specific factor that is driving other firms to look elsewhere for revenue. Given iShares’ dominant position and Vanguard’s ability to undercut most other providers, many of Europe’s other ETF brands have turned to higher-margin smart beta products, adding complexity to fund and strategy selection.

Morningstar warns this could lead to an increasing amount of complex products sprouting up all over the European industry, with AUM in such funds having already quadrupled in the past four years.

“[Smart beta ETFs’] growth has been driven by new cashflows, new launches and the entrance of new players — some of which are traditional dyed-in-the-wool active managers,” says the firm’s director of global ETF research, Ben Johnson.