A massive battle is about to erupt in the ETF sector offering private investors a huge new array of cheap, effective funds that invest in everything from fast expanding Indian mega-caps through to global value stocks. The days of 1% or even 1.5% annual fees for managing specialist funds that fail to track the key indices could soon be a thing of the past if new providers like Lyxor and Deutsche Bank have their way – they’re launching a slew of new funds that’s bound to cause market leader Barclay’s iShares unit to react with yet more new offerings, possibly even kicking off a price battle with asset managers falling over themselves to cut the fees charged to private investors.
This battle has been a long time in the making. In the US investing in market traded index fund vehicles – exchange traded funds or ETFs – is absolutely huge amongst private investors with providers like iShares and Vanguard bagging countless hundreds of billions in funds under management off the back of a fast expanding market boasting over 550 funds and fees that are sometimes as low as 0.10% per annum. In the UK iShares pretty much had the market to themselves until 2006 , marketing their wide range of products mainly to institutions and high net worth individuals tempted by annual management fees that varied between 0.2% (for their bond and gilt funds) and 0.75% for their more specialist funds. Then in the summer of 2006* *the competition finally arrived in town. First on the scene was a small company called ETF Securities which launched a series of funds that focussed on the commodities sector. Then back in spring of this year SocGen’s big European specialist Lyxor launched the first ETF tracker that followed the FTSE All Share index. Lyxor are now poised to rapidly expand – expect at least 8 new funds in the next month or two – and they’ve been followed by Deutsche bank which has also just launched 18 different ETFs onto the UK market.
The humble private investor should be the biggest beneficiary of this intense new competition. The first big plus will be lower costs – not one of the new trackers launched charges 1% or more in annual expenses (most charge less than 0.5%) and there are no initial charges. Compare those fees with most unit trust tracker funds that charge at least 1% per annum (although there are some big exceptions like the Fidelity UK Moneybuilder tracker fund that charges only 0.1% pa for tracking the FTSE All) and active fund managers who charge anything between 1.5 and 2% per annum plus an initial charge. Frankly in the crucial FTSE 100 market for instance, there’s no good reason now why you need to pay more than 0.3% in fees every year to a fund provider.
Index funds like ETFs also possess another killer advantage – unlike active fund managers you’re not buying into the risk of your fund manager making the wrong decisions. ETFs effectively buy the market through one fund at low cost and the only risk is that the tracking error might start to creep up because of inefficiencies in the process. Luckily most of the big providers seem to be fairly adept at controlling even this risk – iShares FTSE 100 tracker over the last four months for instance has under-performed the index by only 0.47% (annualized) while Lyxor’s FTSE 100 ETF has a tracking error of only 0.01%.
ETF’s are also opening up a stunning array of new markets and indices that should appeal to the more experienced investor.
· *India.* This is perhaps the most exciting new market on offer via Lyxor and Deutsche – they’re both offering ETFs that track the crucial S&P /CNX Nifty Fifty index of top Indian mega-caps like Reliance, Infosys and Tata (the annual expense ratio in both cases is 0.85% ). These top 50 companies cover 25 sectors and account for over 55% of the entire market cap of Indian companies. Annual returns over the last 7 years have been around 14% and 40% over the last three years although the index is pretty volatile and arguably rather expensive in PE terms
· *Africa and the Middle East*. Lyxor is to launch a fund that tracks the South African FTSE /JSE Top 40 index of top South African giants (the TER is 0.85% again) while Deutsche has also just launched an ETF ‘snappily’ called MSCI EM EMEA ETF (surely enough acronyms, Ed) which tracks the top companies in the emerging markets of Eastern Europe and the Mid East and Africa (the TER on XMEA is just 0.7%)
· One theme that seems to be especially popular with index fund providers is *renewable energy* and *green *markets. SocGen’s structured product team has for instance in the past few weeks launched not one but four products that track green indices ; the European Renewables fund tracks the top 10 players in the hydro power, solar and wind power sector ; The World Bioenergy fund tracks players around the world in products like bio-ethanol ; The World Solar index fund tracks the leading the solar energy equipment makers and the World Uranium fund tracks big players in the mining and processing of , guess what….uranium. All four funds are not actually exchange traded funds as such – they’re traded notes that don’t pay out any dividends from holding shares in the index which is provided via DowJones and a specialist firm called SAM – and the expense ratio is a little high at 1% per annum. iShares has also launched funds that track similar markets but via a different index provider – two new launches include a Global Water index fund and a Global Clean energy fund, both using indices from S&P, and both with expense ratio’s of 0.65%. Mainstream green funds typically tend to target the same kinds of companies – though not the same indices – and charge 1.5% or more per annum plus high initial charges or the privilege.
· *Value shares*. A big debate currently rages in the academic community about the virtues of tracking indices that don’t weight according to market size but company fundamentals. Purists of efficient markets argue that these indices are the artificial creations of marketing departments that don’t really reflect true market fundamentals. Enthusiasts simply point out that value indices for instance consistently out-perform the wider markets and can provide income investors with a fantastic steady income plus capital gains. Currently iShares has the best ETF in this space by far – their UK Dividend Plus pays around 4% per annum – and targets the highest dividend payers of the FTSE 350 – its Total expense ratio is also a very reasonable 0.4% per annum. But Deutsche are clearly muscling in on this space with two new funds – the DJ STOXX Global Select Dividends 100 fund that pays out 3.52$ from holding the worlds leading large cap, high yield stocks (TER is 0.5%) and the even more select DJ EuroSTOXX 50 Dividend 30 fund that targets the top European dividend payers (the yield is 2.93% and the TER is a very reasonable 0.3%).
· *Commodities*. ETF Securities isn’t about to be left behind though in this rush of new products though. They’ve recently launched a highly innovative ETF that holds a physical basket of precious metals – gold, silver, platinum and palladium feature in the fund which offers investors direct exposure to spot prices with an average expense ratio of just 0.43% pa. It’s also launched a series of funds that track changes in the future price of oil – funds invest in 1, 2 and 3 year futures prices for Brent oil and West Texas crude.
· *Global Sectors*. iShares itself has also been busy, launching a series of funds that target global sectors like Water, global utilities and infra-structure companies plus their own version of a listed global private equity index that invests in companies like 3i and SVG. Lyxor have also responded with their own listed private equity ETF – but theirs tracks an alternative index called the Privex developed with Dow Jones.
· The FTSE All Share. Bizarrely competition to provide an index tracker in this sector has largely been left to unit trust trackers that have tended with some big exceptions (such as Fidelity and F&C at 0.1% and 0.3% respectively) to charge annual fees of 1% or more. Now the ETF providers are busting into the market. Lyxor was first off the mark with a fund that charged just 0.4% and now Deutsche have weighed in with their own fund that also charges 0.4%.
Labels: barclay, ETF, exchange traded funds, ishares, trakcers
The Telegraph reports today that Schroders has closed its $6bn agricultural fund after too many investors rushed to plough money into it.
