ETF fee cuts fail to win over European investors, says State Street executive
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The rush to lower fees in the European exchange traded fund market has not helped providers grow market share, according to a senior executive at State Street Global Advisors.
In recent years ETF issuers have launched “low-cost building blocks” in core areas, such as US and European large-cap equities, often by shunning the best-known index benchmark providers.
However, Matteo Andreetto, head of SSGA’s SPDR ETF business for Europe, the Middle East and Africa, said pricing had not been a “driver of growth in the core equity space” for ETFs.
This situation contrasts with the US market, where “pricing has been a tool used to breed adoption” of ETFs and has resulted in “significant growth”, said Mr Andreetto.
Mr Andreetto said one reason why large fee cuts had not driven growth in core equity ETFs was because of the fragmented nature of European distribution.
Detlef Glow, head of Emea research at Refinitiv Lipper, said the evidence showed that “the cheapest fund does not capture all the flows”.
He gave the example of Xtrackers cutting the management fee of its Euro Stoxx 50 ETF to zero in 2009.
“Despite the fact that there was an ETF out there with a fee of zero basis points, the majority of flows went still into much more expensive products,” Glow said. DWS has since increased the ETF’s annual fee and now charges 9 basis points.
“The same was true when iShares launched its core ETF range. Instead of switching over to the cheaper product, the vast majority of assets remained in the more expensive ETFs from the same promoter,” Glow added.
Monika Dutt, director of European passive strategies research at Morningstar, said one reason for this inertia could be that “switching from a more expensive product to a cheaper product could trigger a capital gains tax bill, so the cost of switching may not be worthwhile”.
Dutt added that the ETF market was also competitive. “If one ETF provider lowers a fee on a market-cap [weighted] ETF, others are likely to follow to protect their funds from outflows. In these cases, clients often put pressure on asset managers to lower fees to retain business. For this reason, a fee cut will not necessarily lead to an inflow.”
Meanwhile Andreetto said SSGA had decided not to compete in certain investment exposures as it was “more expensive to launch Ucits ETFs than US ETFs”.
The higher European costs meant there was a “higher break-even point” compared with the US, he said.
Part of this was the result of index provider costs, which were “becoming more of a pain point for the whole industry”, he said.
Dutt also said that when an ETF’s fee was cut significantly, the product’s benchmark often changed. “The cheapest ETFs track indices provided by less-well-known names, such as Solactive,” she said.
The difference in ETF costs between the US and Europe is also a reason why SSGA has a large European institutional client base invested in its US-domiciled $389bn SPDR S&P 500 ETF, which charges less than 10bp per annum.
This type of demand means that while SSGA has about $60bn in Ucits ETFs, it has a further $40bn of European client money in US ETFs, to create a European business of some $100bn.
SSGA’s size in the US “helps considerably” with large clients in Europe, Andreetto said.