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Credit negative SSGA ETF fee reductions point to a more competitive market, says Moody’s


State Street Global Advisors (SSG) lowered the management fees on 41 of its 146 exchange-traded funds (ETFs), last week. The median decline of the 41 ETFs’ fee rates was 15 basis points (bp), to 35 bp from 50 bp.

Moody’s notes that the fee reductions are credit negative for SSGA and other ETF providers, especially BlackRock, Inc (A1stable), The Charles Schwab Corporation (A2 stable), and Vanguard (unrated), because they point to increasing commoditisation of ETFs.
Neal Epstein (pictured), Senior Credit Officer at Moody’s says: “Competition is driving the commoditisation of index ETF products. Many investors assert that the price advantage of cheap, passively managed ETFs outweighs any performance advantage that traditional, actively managed funds can achieve. As investors have become accustomed to low pricing, the ETF business is experiencing higher elasticity of demand than other areas of the fund business. Increasingly, within a given fund category, pricing, rather than relative performance, drives sales.”
The estimated USD7 million reduction in gross fee revenue stemming from the decline in expense ratios is not in and of itself material to SSGA, but Moody’s notes that the greatest percentage decline in pricing occurred in the fund category most sensitive to competition: US equities. This includes broad market and style-oriented funds. The fee cuts here signal that SSGA will defend its ETF franchise from other low-cost competitors.
[Three large ETF competitors dominate the USD2.8 trillion global market, and SSGA holds the second-largest market share, with 17%. The big three have gained scale by offering passively managed funds that provide broad exposure to entire securities markets. The largest fund sold by the big three is SSGA’s SPDR S&P 500 ETF, which holds USD188 billion, and charges 9 bp. It is followed by BlackRock’s iShares Core S&P 500 ETF (USD69 billion, charging 7 bp), and Vanguard’s Total Stock Market ETF (USD52 billion, charging 5 bp).
Competition in the ETF market is also driving product diversification. Since smaller competitors cannot profitably enter the big three providers’ market-index business, differentiated “factor oriented” indices have been commercialised. ETFs designed to track these new indices provide exposure to subsets of the securities markets that capture common behaviour, such as high momentum or low volatility equities or long or short duration bonds. These products are priced more like sector ETFs, receiving fees of 30 bp-60 bp.

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