FEES: On the cheap

SaleProviders have been jostling to be the lowest priced out there, but is there more to competition than just the headline total expense ratio (TER) of a product, asks Angele Spiteri Paris. ETFs have been sold on the fact that they offer cheap exposure to various markets and asset classes. And a glance over some marketing campaigns finds price often being given the starring role.
One of the providers playing the cost card is Amundi ETF. Matthieu Guignard, head of product development at Amundi ETF, says: “Price is one of the first things clients consider when making investment decisions around ETFs. Cost is an important matter to us. We’ve adopted cost-efficiency positioning with a lower TER [total expense rato] – which includes the management fee. When comparing ETFs on price, you need to compare TER and not just the management fee.”
Guignard claims the Amundi range is, on average, 20% cheaper than those of its competitors.
But Tim Mitchell, head of specialist funds at Invesco, says: “You can only know whether you did actually buy the cheapest product by looking back historically. Things like tracking error constraints and other elements of the structure of the product make a difference to the overall cost.”
John Davies, head of ETF licensing Europe at Standard & Poor’s Index, says: “Some ETF providers such as Amundi and HSBC are focusing on the low fees for their product offering, whereas iShares is drawing investors’ attention to the fact that the cost of an ETF can’t be judged by its TER alone.”
Furthermore, David Bower, head of  European marketing at iShares, says: “Some providers say their TER is the lowest, but you have to consider that this does not include all costs. Rebalancing in physical ETFs and the swap fees in synthetic products, for example, are  excluded from the TER.”
Regardless of its reflection on the real expense to the investor, cost continues to be an attention grabber and clients, especially retail clients, can often be seduced by a cheaper alternative. 
But as competition becomes stiffer, how can providers continue to push the price of their products down while still having a sustainable business?
According to Guignard, at Amundi, being a later player to come to the ETF market has played in his firm’s favour. He says: “Some players have been around for a number of years and their fees were adapted to that first market for ETFs.”
Davies, at S&P, says: “A number of banks have come into the ETF space and they’re running everything themselves which internalises cost efficiency.”
Mitchell, at Invesco, adds: “Investment banks who, for example, manage their own swaps internally can afford to push the cost down.”
Furthermore, for some of these banks the ETF business is not considered to be a seminal element in the firm’s profitability and therefore they can afford to slash their prices. For some, it’s more about offering clients a full suite of products.
Chellew, at HSBC, says: “Our ETF business is about giving our clients the widest possible choice when it comes to market access products.”
For some ETF providers tied to banks, having an ETF business is not necessarily about making money. A few additional basis points on a product level wouldn’t make much of a dent on the profitability of a large banking organisation, which is often why they can afford to set their prices low and keep them that way. Competitive edge
Guignard says: “Competition within the ETF market has been beneficial for investors. There was a time when there was only one S&P500 ETF, priced at around 40bps. Our product is priced at 15bps only, which is the lowest TER available in Europe.”
Chellew, at HSBC, says: “We take being price-competitive very seriously. You have to be competitive and dynamic around pricing because the pricing point is changing as a result of competition while investors using ETFs are doing so in part to drive down total costs within their portfolios.”
But other providers have tried to move away from marketing around cost.
Manooj Mistry, head of db x-trackers UK, says: “You do want your product to be competitive on a cost basis, but we try to educate our clients to not just look at headline TER.”
Thinking at Credit Suisse is along the same lines. Dan Draper, head of ETFs at Credit Suisse, says: “We try to be competitive on a TER basis, especially where we compete with existing ETFs. But with new products, such as the Credit Suisse ETFs on China and Chile, we try to ensure we offer investors a strong value proposition. We try to give investors the highest level of quality and transparency without asking them to compromise on price.”
Danièle Tohme Adet, head of ETF and indexed funds development at Sigma BNPPAM, says: “When comparing the price of two ETFs you need to check the domiciliation of the fund because what is included in the management fee differs from one country to another. For example, in France the management fee is equal to the TER while in Luxembourg the management fee does not include administration costs, etc, so the TER looks a lot different to the management fee.”
Bower, at iShares, says: “Investors do want cost efficiency but they also want a reliable partner, who offers good-quality service, administration and all the things that come with a  robust investment.”
But although from the outside looking in pricing pressure may seem quite high, Draper says: “We don’t see pricing pressure being particularly high around TER. The pressure is more about trading cost and transparency.” On the spread
Another cost element providers could seek to compete on is the bid/offer spread.
Guignard, at Amundi, says: “Having an integrated set-up with Crédit Agricole CIB as our main market maker controls the quality of our bid/offer spread. For example, on our Eurostoxx 50 ETF listed on Euronext we have an average 4.6bps bid/offer spread while others’ range from 5.3bps to 10bps on the same underlying index.”
Bower, at iShares, says: “The size of the trade  and the exposure of the fund are factors amongst others driving the bid/offer spread. The 4.6bps quotes could have been on a particular day, during a particular hour on a particular product.”
According to Mitchell, at Invesco: “You cannot really control the bid/offer spread since it’s the market makers setting it. What you can do is guarantee a maximum spread.”
Something that does affect the bid/offer spread is timing. Mistry, at db x-trackers, says: “Spreads are tighter when the underlying market is open. So ETFs based on US indices have wider spreads in the [European] morning, when the US markets are closed.”
Also, the number of market makers you have in a particular product makes a difference. Bower, at iShares, says: “Liquidity and associated costs are driven by the underlying securities in an ETF as well as the level of market maker support. We have a multi-dealer model and are very aware of the fact that the liquidity differentials can be material.” Value for money
Chellew, at HSBC, says: “But price isn’t everything. There’s also the quality provided by the trust in the providers brand and the strength of the organisation bringing the product to market. We are not seeking to lead solely on the basis of price – we want to be seen as offering the best value for money based on the features clients want.”
Davies, at S&P, says: “Fees are an important factor when choosing ETFs but investors need to understand the risks involved in investing in these products.”
Mitchell says: “The headline TER is handy for some to claim they’re the cheapest, but there is more to ETF cost than that.”
Draper, at Credit Suisse, says: “When it comes to cost, you have to decide what is going to be most effective for you as a client. If you’re a hedge fund, the annul TER doesn’t make much of a difference because your holding period is likely to be relatively short.  Therefore trading and execution costs become of paramount concern.” ©2011 funds europe

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