However often people deny it, it’s clear that the ETF and index price war is intensifying, now in Europe as well as in the US. It’s a bit like a football club chairman’s dreaded “vote of confidence.” The more he denies any plans to sack the club’s manager, the sooner the day of reckoning is approaching.
Fee cuts are great news for investors, but they also mean we’re going to be spending more time analysing indices, working out how they are put together and what investment exposure they create.
iShares’ response to price pressure from competitors has been to introduce new, lower-cost ETF ranges, while keeping existing products on the shelf at their original annual fees.
The firm did it in the US two months ago with a new “core” range of products and has now unveiled a similar strategy in Europe.
But the pricing policy of the world’s largest ETF issuer is confusing at first sight.
In an aggressive move, iShares’ new minimum-volatility ETFs are priced at an big discount to competing products from rivals SPDR and Ossiam. Less obviously, some of the newer trackers undercut existing ETFs that are based on simpler index versions.
This anomaly stands out most clearly in the introduction of a new “smart beta” iShares S&P 500 minimum volatility ETF, which is priced at 0.2 percent a year in fees. iShares’ capitalisation-weighted S&P 500 fund, which was introduced over a decade ago and has over $10 billion in assets, charges double that.
Here, what’s notionally a premium product is on offer to investors at lower cost than a straightforward index idea, which sounds like a slip-up.
But given that iShares’ S&P 500 tracker has proved relatively immune to competition from cheaper rival products, it’s unsurprising that BlackRock, iShares’ parent, isn’t in any hurry to cut that 0.4 percent annual fee, which is bringing in over $40 million a year.
The index firms providing the benchmarks for such funds have presumably also had to give some ground by offering cheaper licensing fees for the new tracker funds than they charge on older products, giving fund issuers leeway to launch lower-cost funds.
Overall, iShares’ current moves seem very similar to the differentiated pricing strategies used increasingly by supermarkets, which put premium- and discount-priced product ranges on their shops’ shelves, usually in close proximity.
Supermarkets are regularly accused of trying to hoodwink consumers by adopting confusing and sometimes apparently contradictory pricing policies. Almost three quarters of buyers think this is what sellers are trying to do, according to a recent Which survey.
Now similar pricing confusion could be heading the way of the index funds and financial products markets.
Throw in the European securities market regulator’s new rules on index transparency, which will make it more difficult to hide the recipes behind more complicated index ideas, and it looks as though product strategy and pricing is going to be in flux for some time to come.
But overall the recent price cuts in the ETF market are welcome. Given the stickiness of high fees in the active funds world, something Ed Moisson of Lipper commented on at his firm’s forum last week, the fee reductions also make ETFs ever more competitive and are improving the market’s long-term growth prospects as a result. But we’re all going to be spending a lot more time going back to the index underlying each tracker fund.