ETF issuers in Europe may increasingly look beyond broad index strategies – especially to thematics and global fixed income – for new products as they seek to stay profitable while expanding in the fragmented market, finds a new report from Bloomberg Intelligence (BI). Competition and economies of scale have squeezed fees in the US for years, but Europe’s structural costs limit how low they can go.
Henry Jim, BI ETF Analyst, comments: “Of the EUR70 billion in European ETF flows in H1, 90 per cent went to ETFs priced below 0.3 per cent. In a bid to generate more revenue, issuers in Europe are shifting their product strategies from competing on price to offering more value-added approaches. More than half of the 250 ETFs launched in the past 18 months were priced above 0.3 per cent, with value-added strategies, including global fixed income and thematics.”
Maintaining Pricing Power While Growing Revenue
Since 2008, ETF assets have grown around 15x in both Europe and the US, but ETF revenue has expanded 15x in Europe and just 11x in the US. The asset-weighted average expense ratio is about 5bps higher in Europe than the US, due partly to the regions’ mix of investment strategies. Faster uptake of broad-based index ETFs with lower expense ratios – and fierce competition – have driven costs down in the US, while Europe’s market is more tilted toward specialized ETFs that command higher fees.
Bond Flows Tilt Toward Higher-Cost Strategies
Fixed-income funds make up 25 per cent of European ETFs by assets but have taken in half of flows for the past year. Though fixed-income ETFs’ asset-weighted average (AWA) expense ratio is only 0.19 per cent , recent flows into bond ETFs are gravitating toward higher-priced ones, averaging 0.26 per cent by flow size. Equity funds still make up almost three-quarters of all ETF assets in Europe, with a 0.22 per cent AWA expense ratio – also the industry average. Commodity ETFs, including futures-based and precious-metals ETFs, have a higher AWA expense ratio of 0.37 per cent.