Last Updated: 22 November 2023
One of the much-vaunted benefits of using ETFs is their cost-effectiveness. While it is undoubtedly true that ETFs are much cheaper than actively managed strategies, there is still some considerable variation between providers, products and geographical regions.
According to research firm ETFGI, on an asset weighted basis, the global average total expense ratio for an ETF is 34 basis points (bps). In the US, the average TER is 32bps, compared with 38bps in Europe.
Deborah Fuhr, partner at ETFGI, says: “It’s unlikely that European ETFs and ETPs will ever be as cheap as those in the US.” ETFs are listed on one exchange in the US, there is one legal system, one language, one tax system, one currency and many US products are based on underlying US assets which makes the custody, admin, trading and settlement easier.
It is a far costlier endeavour to run ETFs in Europe as there are multiple exchanges, currencies, languages, taxes, settlement systems, regulatory requirements to register and cross-list and it requires a sales force in a number of different locations.
“That pushes up the legal expenses as well as the administration and settlement costs and foreign tax and currency has an impact,” says Fuhr.
It’s not only doing business in Europe that is different to the US: so too are the major players in this market. The top three players in Europe are iShares, DB x-trackers and Lyxor Asset Management, with respective market shares of 38%, 14% and 11%. In the US, iShares, State Street and Vanguard are the ETF market’s top three issuers by assets under management.
In terms of cost, however, there’s a minimal difference between these three largest European players, with an asset-weighted average TER ranging from 35 to 38bps across the trio.
Manooj Mistry, head of exchange-traded products for EMEA at Deutsche Bank Asset and Wealth Management, says: “The small differential of only three basis points between the three largest players in the market reflects the fact that we are all providing a broad product base with many similar products.”
In addition, there is a skew towards a certain type of products: for example trackers of national country benchmark equity indices, which tend to be low-cost products. More exotic benchmarks, however, come at a much higher annual fee.
Rob Nestor, global head of product marketing at BlackRock, says: “There is a huge variation between different products. For example, iShares’ US-listed S&P 500 ETF (IVV) charges a TER of only 7bps whereas our Russia country fund has a charge of 74bps.”
That cost disparity reflects the lack of economies of scale, the wider spreads and the paucity of counterparties in Russia.
A spread of costs is also evident in the fixed income market. US Treasury ETF products have low TERs because they are very liquid and have a large number of possible counterparties.
But an emerging market high yield fund has a much higher TER because it requires a lot of oversight and local expertise, both of which boost the costs of running the ETF.
Outside the mainstream bond and equity products, other asset classes have higher fees. That’s clearly illustrated in the table below, which shows average asset-weighted TERs across European ETP providers: the TER for commodity specialist ETF Securities is 45bps.