The recent outbreak of ETF fee-cutting looks certain to continue, says Jose Garcia-Zarate.
The ETF fee war shows no sign of abating. On the contrary, fee cuts have become part and parcel of life in ETF-land. Europe still lags behind the US when it comes to aggressive price-cutting. On this side of the Atlantic, we have yet to see zero-fee funds, let alone funds that actually pay investors, albeit temporarily, for the honour of holding them. Still, it’s clear that the only direction for ETF fees in Europe is south.
The growing popularity of passive investing is fuelling the drive towards lower fees. In Europe ETFs already account for close to 10% of all assets in investment funds. If we factor in money held in traditional index funds, that figure rises to nearly 20%. In this regard too, the US is well ahead of Europe. Passive solutions account for 40% of total assets in US investment funds.
Entering the fray
The outlook for the ETF market in Europe remains resolutely positive. Asset managers who have been reluctant to enter the market are now proactively fighting for a slice of the pie. In many cases, new ETF providers have come to market with aggressively priced propositions to challenge the incumbents.
More good news for European investors is that ETF fee cuts are no longer exclusive to equity exposures. Fee compression in the fixed-income space is now gathering pace. This is an area expected to see strong growth, and it’s one where iShares retains an impressive 60% market share in Europe.
To undermine this supremacy, several competing ETF providers now offer mainstream government bond market ETFs with single-digit ongoing charges. And the push down on fees is extending to other areas of the bond market, such as investment-grade corporates and emerging market debt.
However, keen to defend its turf, iShares has made fee cuts of its own. For example, the asset-weighted average ongoing charge of a plain vanilla UK government bond ETF has dropped from 0.18% in 2018 to 0.09% now, as a direct result of the decision by iShares to cut its fee for the market-leading (in terms of assets under management) iShares Core UK Gilts ETF from 0.2% to 0.07%. This steep cut has placed the iShares ETF on an even keel with its cheaper competitors, the Lyxor FTSE Actuaries UK Gilts (DR) ETF (0.07%) and the Invesco UK Gilts ETF (0.06%).
Competition on fees is also spilling over from the realm of plain vanilla ETFs into that of strategic-beta ETFs. This has been an area of substantial growth in recent years, particularly in equity market strategies. However, there is a growing sense that the development and management of these ETFs does not entail much in the way of additional costs that justify higher fees relative to plain vanilla offerings.
Here too we have seen new entrants to the ETF market challenge established providers. Indeed, some newcomers have found it easier to plant their flag by focusing their efforts on the strategic-beta and alternative fields, often leveraging on their active management capabilities to deploy a mix of rules-based and active strategies via the ETF wrapper at very competitive fees.
Another area where we see increased fee competition is in the field of environment, social and governance (ESG)- focused ETFs. With ongoing charges ranging from 0.05% to 0.2%, investors can now buy a range of sustainable portfolio building blocks without paying a premium for the privilege. This befits the marketing message that ESG is no longer just a nice-to-have overlay for a portfolio, but rather a mainstream way of investing.
The trend towards lower fees is even extending to the additional operations inherent in the buying and selling of ETFs. In the US in particular, several stockbrokers offer commission-free trading for ETFs. Trading costs such as bid/ offer spreads and brokerage commissions can constitute an significant chunk of the overall cost of owning ETFs.
ETF fees look certain to fall,which is good news for investors overall, as increased competition from the passive side of the industry will in theory incentivise fee cuts in the active fund space.
Jose Garcia-Zarate is associate director of ETF research EMEA at Morningstar.