ETFs Increasingly Popular as Core Holdings

Individuals are increasingly using exchange-traded funds as core holdings rather than tactical tools, with a focus on their low-cost benefits

Hortense Bioy, CFA 6 November, 2014 | 10:18AM
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A noteworthy development in the European ETP marketplace over the past couple of years has been the widespread reduction in fees. Similar to what has been witnessed in the US, a number of European ETP providers, including iShares, db X-trackers, Lyxor, Amundi, UBS, Source, Vanguard and SPDR have slashed total expense ratios (TERs) on ETFs linked to some of the most popular benchmarks (e.g. FTSE 100, S&P 500, MSCI Emerging Markets).

The cuts have been significant, ranging from 0.05 to 0.28 percentage points (pp) on the newly-created suite of ‘Core’ iShares ETFs for instance, while Amundi has slashed expense ratios by 0.25 pp on several Emerging Market and regional ETFs. Investors can now gain exposure to US and UK large cap-equities for a modest 0.05% and 0.09% in annual fees, respectively.

Most providers have explained the cuts as the result of economies of scale while categorically denying the existence of a ‘price war’. However, we believe some felt compelled to lower fees in response to the intensifying competition, especially following the entry of low-cost issuer Vanguard in 2012. While it remains to be seen if this race to the bottom will pay off for the providers, it certainly benefits investors, who will give up less of their returns in the form of fees.

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Hortense Bioy, CFA

Hortense Bioy, CFA  is global head of sustainability research at Morningstar

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