Margin Squeeze

The last week has given us plenty of evidence that competitive pressures in the exchange-traded products market are intensifying.

Vanguard’s index fund launch last week set a new low-water mark for fund management charges – 0.15% for a UK equity fund tracking the FTSE All Share Index, the same for a UK government bond tracker, 0.20% for a fund tracking US equities, and 0.30% for a developed world ex-UK portfolio.

HSBC has very quickly followed suit, cutting its index fund fees by up to 75% in some case, more if you measure the decline in the total expense ratio. Its annual management charge on seven equity index funds is now set at 0.25%, with projected total expense ratios of between 0.27% and 0.37%.

Yesterday Source staked a claim for its share of the rapidly-growing gold ETF/ETC market, launching its first physically-backed commodity product on the London Stock Exchange, and undercutting its major competitors by at least 10 basis points in annual fees, with an annual charge of 0.29%. It will be fascinating to see how much of the existing gold tracker market Source can attract, or indeed whether its competitors will follow suit and cut their own fees. Notwithstanding the restrictions on marketing to US investors, can Source take away some of the US$33 billion-plus invested in the SPDR Gold Trust?

And, also yesterday, Paris-based ETF issuer CASAM expanded its ETF range substantially, with the launch of 17 new funds, covering equity, fixed income, short and leveraged indices, and all with annual fees at or below the closest comparable competitor funds.

Taking the example of CASAM’s MSCI World ETF, which carries an expense ratio of 0.35% per annum, competitors’ funds are priced at 0.50% (iShares), 0.46% (UBS), 0.45% (Lyxor, Source, db x-trackers) and 0.40% (Comstage).

This is all great news for investors, as the price of putting together a diversified portfolio of ETFs and/or index funds is steadily decreasing, and perhaps Europe will soon be able to compete with Matt Hougan’s 13.65 basis point portfolio.

It’s obviously not such good news if you’re selling or running expensive actively-managed funds, are reliant on mutual funds for commission, or are otherwise engaged in the higher layers of financial product fee structures. But, more importantly, won’t these cuts start to put pressure on some of the more expensive players in the tracker market?

iShares, for example, sets its fees consistently above those of other ETF issuers offering funds tracking the same indices. With competition on fees at even this low-cost end of the investment industry getting hotter, will iShares also be forced to follow suit and cut its rates? And did the members of the Barclays board who took the decision to sell their funds operation do so at just the right time?

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