Fee Convergence And Asset Levels

What do the latest ETF assets under management figures show, and what do fee comparisons with actively-managed funds tell us about the ETF market’s growth prospects?

Barclays Global Investors’ latest ETF Industry Preview, released earlier today, shows that ETF and ETP assets around the world have started to rise again, after a lengthy dip from the peak recorded at the end of 2007. Whether this is a sustainable trend is another matter, as Debbie Fuhr’s team’s figures show that 80% of global ETF assets were in equities at the end of March. With ETF assets worldwide totalling $634 billion at the latest count, Fuhr’s oft-stated target of $2 trillion under management by 2011 seems heavily dependent on the share markets rebounding.

As BGI states elsewhere in the document, European ETF assets have grown more quickly than the US ETF market did during the earliest years of its development – something that’s unsurprising. But there is one area where the US and European ETF markets have converged quite neatly – and that’s in the level of fees charged.

BGI shows that the average total expense ratio (“TER”) for US ETFs at the end of February 2009 was 31 basis points. In Europe the average TER was – 31 basis points.

There’s still some divergence between the average TER of an equity ETF in the US (32 b.p.) and in Europe (37 b.p.). Europe still can’t match the ultra-low fees on offer from US large-cap equity ETFs, which average 12 basis points. The cheapest equity ETF category in Europe is “regional exposure – eurozone” – comprising the DJ Euro Stoxx 50 funds, which I suppose are the equivalent of a large-cap US fund.

Conversely, European fixed income ETFs average 16 b.p., compared to 25 b.p. in the US for the equivalent category. This sample is slightly biased, though, by the heavy weighting accorded to the ultra-cheap money market ETFs in Europe.

Inverse and leveraged ETFs are substantially cheaper in Europe than in the US – ranging from 41 to 61 b.p. in fees, than in the US, where there seems to be a fixed rate of 95 b.p.. That’s surprising, given that the sector is so much larger and more developed in the US. It must be to do with the prevalence of short-term traders and retail investors in the US market, who are perhaps less price-sensitive.

What does stand out in BGI’s comparison tables is the continuing gulf, both in the US and Europe, between ETF fees and actively managed fund fees. The average actively managed domestic equity fund costs 175 b.p. in Europe, 141 b.p. in the US. The average actively managed fixed income fund costs over 100 b.p. in both markets.

And ETFs still look pretty competitive when compared to more traditionally-managed index funds, which average 78 b.p. in the US in fees, 87 b.p. in Europe.

Total expense ratios are not the end of the story when it comes to comparing costs, unfortunately. If there are implicit counterparty exposures in a particular ETF fund structure, some adjustment should be made for covering those costs. Equally, though, there may be additional charges in an actively-managed fund over and above the quoted rate.

But, on a headline fee comparison, there seems no reason why the shift in assets from other fund types to ETFs should halt any time soon. While Debbie Fuhr’s “$2 trillion by 2011” forecast may be looking optimistic, given current equity market levels, the implicit message of strong ETF market growth still looks very well-founded.

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