Cost of equity ETFs slow to reduce

Jun 7th, 2016 | By | Category: Equities

In the wake of the so-called exchange-traded fund price war, the actual cost of ETFs has not reduced as much as some investors would have hoped, with prices only reducing by 0.03% in the last ten years.

James King, Head of Private Client, Partner, Price Bailey

James King, Head of Private Client, Partner, Price Bailey

According to new data from Morningstar, the asset-weighted average total expense ratio of an equity ETF in the UK has only declined by 0.03% in the past decade, from 0.35% in 2006 to 0.32% today.  In the same time period the number of ETFs has risen from 119 to more than 550.

(The asset-weighted average is calculated by multiplying fund size by fund fees, and gives more weight to more popular funds in terms of their assets, instead of a simple average.)

However, the numbers can be significantly skewed in the ETF industry’s favour if taken over a shorter time horizon. The average fee for equity ETFs was 0.40% in both 2010 and 2011, therefore fees have fallen by 20% in five years.

A significant cost cutting move was when iShares cut fees on its flagship FTSE 100 UCITS ETF (ISF) last year – one of the first ETFs to list in the UK – from 0.40% to just 0.07%, for both distributing and accumulating share classes.

The provider has not budged yet on the distributing share class of its S&P 500 UCITS ETF (IUSA) at 0.40%, and has only cut fees to the same level of 0.07% on the accumulating share class (CSPX).

“It is poor practice to have two funds that look the same on the outside but with two different charging structures, [that’s] not very TCF is it?” said James King, head of the private client department at wealth firm Price Bailey, referring to the Financial Conduct Authority’s Treating Customers Fairly rules. “Hopefully it means advisers will look a bit closer at what is being offered.”

Many European passive funds have been cut to just a handful of basis points, like the Source S&P 500 UCITS ETF (SPXS), now only 0.05%. Yet since the provider cut fees last summer there has been little wholescale movement to reduce costs, especially since providers like iShares have already introduced their so-called “core”, cheaper ETF ranges.

As funds from Schwab and iShares tumble towards zero in the US, an average fee of 0.32% still presents a weighty discrepancy in the UK.

Just because a fund is cheap, does not mean it will be the most popular. Source’s super cheap SPXS has $2.5 billion in assets, whereas iShares’ Core S&P 500 UCITS ETF (CSPX), which is 0.02% more expensive, has gathered around $14.5 billion.

Emerging markets, active ETFs, smart beta and multi-factor ETFs continue to drag up the average equity fee. (Ossiam still charges up to 0.75% for its emerging market ETF (DEMV) and the First Trust Emerging Markets AlphaDEX UCITS ETF (FEM) costs 0.80%.)

Providers will continue to charge higher than average fees in certain equity categories until these funds significantly grow in scale. In 2016, the mainstay of ETF investor money remains in mainstream equities.

King warned fellow investors to watch out for additional costs like the bid/offer spread and tracking error of an ETF, and said a good starting point was to watch out for higher fees on “vanilla” funds.

“The ongoing charge figure isn’t everything, but with vanilla type products it is pretty important,” he said.

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