June 1, 2014 6:16 am

Providers jostle to sell cheapest ETF

The BlackRock Inc. logo is displayed at the company's offices in New York, U.S., on Monday, Oct. 14, 2013. BlackRock Inc. is expected to announce earnings tomorrow. Photographer: Craig Warga/Bloomberg©Bloomberg

‘[The fee cut] is in response to client demand for a cost-efficient core range. It is not a response to competitors,’ says Rachel Lord, head of iShares in Europe

The price war in the European exchange traded fund market shows no sign of abating.

And BlackRock has on Monday further stoked that war among passive fund providers by cutting fees on six of its exchange traded funds.

The six ETFs have had their total expense ratios (TER) reduced by between 5 and 28 basis points. A new emerging markets ETF with a TER of 25bp has also been launched. The fee cuts are featured in the launch of a new “core” range of 14 iShares European listed ETFs designed as long-term portfolio holdings.

As the largest ETF provider in Europe, with assets of $212bn, BlackRock’s move represents the most significant development in the price war so far.

David Norman, co-founder of TCF Investment, which offers predominantly passive, multi-asset funds, says the price cuts are “absolutely good news” for investors.

The move follows a flurry of price reductions by rivals who are pursuing the example of the US market, where providers have been undercutting one another fiercely.

Fidelity Worldwide Investment last week announced that charges on its index tracker range had been cut to the lowest level ever for UK retail investors.

Amundi, the French asset manager, reduced fees on its emerging markets ETF range in May.

Amundi has deliberately sought to position itself as the lowest-cost ETF provider in Europe. But that claim has been threatened by the entry in 2012 of Vanguard, which has a history of reducing charges wherever possible, and also by fee cuts by other rivals including Deutsche Asset & Wealth Management and Lyxor.

However, Rachel Lord, head of iShares, BlackRock’s ETF arm, in Europe, dismisses any suggestion that BlackRock is fuelling a price war, insisting that the changes have been under consideration for some time.

“This is in response to client demand for a cost-efficient core range. It is not a response to competitors,” says Ms Lord.

BlackRock, says Miss Lord, wants to attract a new audience of retail investors and financial advisers in Europe to ETFs.

“This is part of a growing trend of retail investors and financial advisers putting ETFs at the very heart of their investment portfolios and adopting passive funds as a home for long-term savings,” she says.

Competition among providers is increasing in tandem with rising inflows in Europe, which have reached $20.3bn in the first four months of the year, already surpassing the $19.6bn gathered over the whole of 2013, according to ETFGI, a consultancy.

Mr Norman says he expects to see more assets moving from actively managed funds to low-cost passive vehicles as awareness of their growing use in pension schemes spreads among retail investors.

“But it does raise questions about other parts of the value chain, particularly platforms where charges are higher than fund fees,” says Mr Norman. He adds that the fee cuts for passive funds will put even more pressure on active managers to generate alpha and force some to reconsider their pricing structures.

Peter Sleep, a senior portfolio manager at 7IM, the investment services manager, agrees. He says trackers need to be cheap but their fees are still overwhelmed by charges from platform operators, an issue that remains unresolved.

However, Mr Sleep doubts whether the fee cuts will encourage more retail investor interest in passive funds. “Maybe at the margin. But retail investors still rely heavily on the media, which loves to talk about well-known active managers,” he says.

Christopher Aldous, chief executive of Pan Asset, which manages a range of all ETF portfolios, says the price reductions for tracker funds are “long overdue”.

“The right price for plain vanilla equity and bond ETFs is probably around 10 basis points or less, rather than the 20bp to 30bp commonly charged,” he says. He adds that providers are still slow to offer innovative products at attractive prices, such as currency hedged ETFs, which are needed by investors and advisers.

Mr Aldous says pension trustees are becoming more aware of the impact of fees on returns. This is likely to fuel more widespread adoption of low-cost tracker funds.

“We are seeing a growing number of enquiries from institutional clients, including charities and pension funds, who are looking carefully at whether they should have more passive exposures in their portfolios,” he says.

Fidelity cut the charges on its seven-strong equity index tracker suite on Wednesday to as low as 7bp a year – less than half of the cost of an average UK index fund, according to the company.

The 0.07 per cent charge will apply to investors purchasing units of Fidelity’s FTSE All-Share index tracker via the fund supermarkets owned by the Fidelity group.

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