Price Competition in ETF Market

LOW COST FUNDS: db X-trackers is the latest ETF provider to slash fees; investors should consider re-allocating their holdings but remain vigilant when evaluating costs

Kenneth Lamont 14 February, 2014 | 3:14PM

Earlier this week, db X-trackers announced it had aggressively cut fees on a newly-created range of core ETFs as part of a wider move to migrate its funds from synthetically to physically backed. The change will see the total expense ratio (TER) on funds tracking the DAX, Euro Stoxx 50, FTSE 100 and the MSCI USA fall to 0.09%, undercutting comparable products offered by rivals iShares, Vanguard and Lyxor. The move, aimed at attracting more assets, is likely to further fan the flames of price competition within the European ETP market.

Fee slashing may grab the headlines but not all investors will benefit from the move. To illustrate the point, we will take a closer look at the FTSE 100 ETFs currently trading on the London Stock Exchange, listed in the table below.

We can observe that with its physically-backed FTSE 100 UCITS ETF, db X-trackers now offers the lowest TER (0.09%) of any fund tracking the FTSE 100. This is great news for investors unconcerned with receiving income, both new and those already invested, who can cut costs by switching to the cheaper offering.

However, investors seeking income through distributed dividends on the same index will still be charged a TER of 0.30% on the physically backed db X-trackers FTSE 100 UCITS ETF – Income, a fund with almost 20 times the assets under management (AUM). The iShares offerings have a similar cost disparity. In September 2013, iShares cut the TER on its accumulating FTSE 100 fund to 0.15% but left the TER on its distributing FTSE 100 fund unchanged at 0.40%, a staggering 25 basis points higher. The distributing fund, with assets under management of £4.1 billion and a larger three-month average daily volume on the London Stock Exchange is far more popular with investors. Both db X-trackers and iShares have reduced fees in order to drive investment into the smaller non- distributing funds.

With this in mind, income-seeking investors currently invested in either of the distributing funds offered by either firm might want to consider re-allocating their money to the Vanguard FTSE 100 ETF (TER 0.10%) or the Lyxor ETF FTSE 100 A/I (TER 0.15%) which provide the same exposure at a fraction of the cost.

Investors Should Look Beyond TER

While, generally speaking, investors should welcome news of falling TERs with open arms, there are other costs that should be factored in before they make the decision to re-deploy assets. It should be remembered that ETFs are traded on exchanges, which adds an additional layer of costs for investors wishing to adjust their portfolio holdings.

The costs of buying and selling an ETF include brokerage commissions and bid/offer spreads. These costs can be significant, especially for smaller investors, and depending on the investment horizon could negate any benefit gained by moving assets to a fund with a lower TER. Longer term investors are likely to benefit most from such a switch, as lower fees over many years will offset the one-off trading costs.

For a more detailed examination of costs associated with ETPs, see our report Every Little Helps: Comparing the Costs of Investing in ETPs versus Index Funds

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
db x-trackers FTSE 100 ETF (DR) 1C892.31 GBP-1.52

About Author

Kenneth Lamont  is a passive funds research analyst for Morningstar Europe.

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