ETFs undercutting active equity funds on fees

Mar 9th, 2017 | By | Category: Equities

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Almost three quarters of actively managed equity funds in the UK charge an identical annual fee of 0.75%, while exchange-traded funds offer much lower average prices.

ETFs undercutting active equity funds on fees

Almost three quarters of actively managed equity funds in the UK charge an identical annual fee of 0.75%.

A study from fund manager SCM Direct said there was proof of anti-competitive behaviour within the active fund world and regulators should look into whether there was some form of price collusion. The report analyzed 683 UK equity funds available on five leading IFA platforms – Transact, Ascentric, Funds Network, Nucleus and Novia – with combined assets of £320.5 billion. It was found that 70% of them had identical fees.

A recent FCA Asset Management Study also found that “there is considerable clustering of prices for active equity funds at both 1% and 0.75% for clean share classes (those that do not include distribution payments).”

While active fund fees remain relatively high, the proliferation of ETFs across the world has forced providers to be more competitive and reduce costs. According to Goldman Sachs, the average typical European equity ETF costs 0.29%.

The SCM Direct report also looked at the average annual management charges of active funds in several key equity sectors. In each sector, ETF Strategy found that there exists a liquid, cheaper ETF option that can offer similar exposure.

In the UK All Companies sector, for example, 67% of active funds charge 0.76% fees. There are three ETFs that track the FTSE All Share, and the cheapest and largest is the £179 million SPDR FTSE UK All Share UCITS ETF (LON: FTAL) which costs 0.20%.

Actively managed UK equity income funds charged a slightly higher average fee of 0.78%. The £95m SPDR S&P UK Dividend Aristocrats UCITS ETF (LON: UKDV) costs 0.30%. The fund tracks the S&P UK High Yield Dividend Aristocrats Index, a reference for the performance of the 30 highest dividend-yielding UK companies within the S&P Europe Broad Market Index that have increased or maintained their dividend payments for at least ten consecutive years.

It tracks 30 stocks, with private security firm G4S, pharmaceuticals group GlaxoSmithKline and energy company SSE as the top three holdings.

For Japanese equities, active managers charge an average 0.75%, yet the cheapest option for just 0.09% is the db X-trackers Nikkei 225 UCITS ETF (LON: XDJP). The largest fund by far is the $2bn iShares Core MSCI Japan IM UCITS ETF (LON: SJPA) for 0.20% fees. It tracks 1,220 stocks – rather than 225 holdings with XDJP – with 20.9% in industrials, 19.7% in consumer discretionary stocks and 13% in financials.

In emerging markets, more than 60% of active funds charge 0.88% annual fees. Tracking the MSCI Emerging Markets Index can cost as little as 0.20%, but the most liquid ETF for 0.25% fees is the $4.6bn iShares Core MSCI Emerging Markets IMI UCITS ETF (LON: EIMI). The index covers 1,900 stocks with more than 26% in China, 14.8% in South Korea and 12.9% in Taiwan.

North America is often where investors will choose a passive fund as they believe the market is efficient due to extensive analyst coverage. Yet the average active fund fee is still 0.75%. Most ETFs are very cheap by comparison. The $2.9bn Source S&P 500 UCITS ETF (LON: SPXP) costs just 0.05%. The $20.8bn iShares Core S&P 500 UCITS ETF (LON: CSPX) is not far behind at 0.07% fees.

Lastly, global equity active funds charge 0.78% every year on average. Global equity ETFs are more reasonably priced, starting at 0.15%. The largest fund in the sector, the $9.5bn iShares Core MSCI World UCITS ETF (LON: SWDA) costs 0.20%. It has 1,648 holdings with financials making up 17.8% of the fund, followed by IT at 15.1% and health care at 12.2%. The US (60%), Japan and the UK are the top three country exposures.

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