On Tuesday, Betashares announced its decision to reduce the management fee on its Australia 200 ETF (A200) from 0.07 per cent to 0.04 per cent, effective from 22 February.
This came just one day after BlackRock announced that it had reduced the fee on its iShares Core S&P/ASX 200 ETF (IOZ) from 0.09 per cent to 0.05 per cent, alongside a fee reduction for the iShares Core Composite Bond ETF (IAF) from 0.15 per cent to 0.10 per cent.
In a statement released on Tuesday afternoon, Betashares chief executive officer (CEO) Alex Vynokur declared that the firm was proud to be “leading the way” on reducing the cost of investing and claimed that A200 now ranks as the lowest cost Australian shares ETF exposure in the world.
“A200 changed the game for investors back in 2018, and as a result of our growing scale, we’re able to reduce fees for investors seeking exposure to Australian shares even further,” he said.
“A200’s fee reduction will make a meaningful difference to the total cost of owning a diversified portfolio of Australian shares at a time when retail and institutional investors alike are increasingly recognising the important role that cost and diversification play within their portfolios.”
Furthermore, Betashares suggested that the launch of A200 in May 2018 had sparked a “wave of price reductions” in ETFs that offer broad exposure to Australian shares, which, it argued, has ultimately benefited local investors.
InvestorDaily reached out to BlackRock for comment following its competitor’s announcement. In a written statement, Jason Collins, deputy head of Australasia, BlackRock, said: “BlackRock is pleased to be the catalyst for making investing more accessible and efficient to Australian advisers and investors.”
“Our iShares ASX200 ETF offering remains the lowest cost exposure tracking a S&P index.”
Previously, and in similar fashion to Betashares, BlackRock said that it was committed to passing on the benefits of its scale to investors and advisers.
“We continually work to offer increased affordability to all types of investors,” Peter Loehnert, Asia-Pacific head of iShares and index investments, BlackRock, said earlier this week.
Are these strategies economically viable?
But Arian Neiron, the CEO and managing director of VanEck — also a provider of Australian shares ETFs — has now questioned the economic viability of these strategies long term.
Speaking to InvestorDaily, Mr Neiron said: “We would say that the strategies tracking Australia’s largest 200 companies, that are currently involved in a price war, while are cheap for investors, may not be economically viable long term.
“Fund managers are for profit enterprises, and as fiduciaries, need to ensure that the strategy is feasible to operate. This means these strategies or funds should not become a ‘loss leader’ that perpetually needs to be subsidised by investors and/or assets in other strategies,” Mr Neiron said.
He added that, given the current macroeconomic environment, “we would argue that having a portfolio with significant concentration in both stocks and sectors may not be prudent risk management, no matter what fee you pay”.
“When we design strategies or we select a desired asset class exposure, we ensure that we are price leading for the given investment strategy. For a number of our offerings we allocate a considerable amount of time, capital, and resources on the investment thesis to ensure the best outcome for clients,” Mr Neiron said.
“These strategies are not commoditised and aim to be best-for-purpose.”
An ongoing battle
While it may seem that Betashares and BlackRock are engaging in an ETF price war, Justin Walsh, associate director, manager research at Morningstar, pointed out that this is not the first time Australian ETF providers have been implicated in a battle over fee cuts.
“There has been a series of reductions of ETF fees, as obviously they’ve gotten bigger and they’ve reached scale,” he told InvestorDaily.
“This is the next stage and you’d probably think, there’s clearly not a long way more to go unless someone wants to offer zero cost ETFs, which I don’t think anyone does.”
One point of difference between the two competing ETFs is that IOZ uses the S&P/ASX 200 Index as its benchmark, while A200 uses the Solactive Australia 200 Index.
“You’ll probably find the licensing fees around that are a little bit different. They’re probably given a little bit more flexibility on costs,” Mr Walsh suggested.
“The index provider, depending on who you’re dealing with, has different structures in terms of how they charge. They might have a capped fee, they might have a basis points fee, it all depends, but they’re some important considerations that come into the pricing of it.”
In marketing material for IOZ, BlackRock highlighted that the S&P/ASX 200 is considered to be the de facto measure of the value and performance of the Australian stock market.
Meanwhile, the Solactive Australia 200 Index utilised by Betashares for its A200 ETF tracks the price movements of the 200 largest companies listed on the ASX.
“When you’re offering passive tracking funds, I think most people would agree that, as long as you’re running it efficiently and that you’re matching the benchmark as closely as possible, then most people would think, ‘yep okay, well the next most important thing is, can I get something that is as low cost as possible?’” commented Mr Walsh.
This focus on cost was also raised in a recent year-end review of the ETF industry by Kongkon Gogoi, senior analyst at Morningstar, who wrote: “Investors are increasingly becoming price-sensitive, with significant inflows going into products with low fees. So, it is unsurprising that the average new dollar is going into low-cost ETFs.”
In this review, Vanguard ranked as the overall top ETF provider in Australia with $41.0 billion in funds under management (FUM) as at end-2022, with Betashares and iShares neck and neck with $23.8 billion and $23.7 billion, respectively. In fourth place was VanEck with $10.8 billion, while fifth place was occupied by State Street with $8.2 billion.
Looking specifically at the top ranking Australian shares ETFs, Vanguard’s Australian Shares Index ETF (VAS) remained the clear leader with approximately $12.4 billion in assets, well ahead of iShares’ IOZ on $3.8 billion and Betashares’ A200 on $2.7 billion.
“iShares is large, there’s no doubt about that, but it’s got quite a bit of ground to make up on Vanguard, and clearly Betashares is not all that far behind, so you can understand why Betashares would want to match iShares or go below it in terms of pricing,” Mr Walsh said.
Notably, IOZ was involved in what is believed to be the single largest trade in Australian ETF history last year, with a significant outflow in August linked to a single institutional client.
A race to the bottom?
Looking ahead, Mr Walsh noted that it will be interesting to see how other providers respond to Betashares and BlackRock.
“It’s not exactly a race to the bottom, but it certainly is really tightening the pricing they’ve got. It’s a story that’s been going on for quite some time, every so often, and it’s going to be interesting to see where it’s going to end up,” he said.
How movements in the Australian ETF provider rankings play out over the next three years will also be another interesting area to watch, according to Mr Walsh.
“I would suggest that those that have good passive ETFs at really, really sharp pricing, they’re the ones you’re probably going to see up towards the top of the leaderboard in terms of funds under management,” he concluded.
State Street and Vanguard indicated to InvestorDaily that they would not be making any comment.
