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Bloomberg Intelligence comments on State Street European ETF fee cut


Athansios Psarofagis and Henry Jim, Bloomberg Intelligence ETF analysts, have produced a note on the recent fee cut by State Street to make its S&P 500 ETF the cheapest in Europe.

The pair writes that this shows how US issuers have been more aggressive in offering cheap exposure in the region. 

“As ETFs continue to grow, we feel the largest impact will be forcing the hand of active managers to reduce fees, which are on average more expensive,” the analysts say.

On average, US ETF exposure is slightly cheaper than that of European exposure, at 17 vs. 20 basis points. Additionally, US issuers on average offer cheaper exposure than local European issuers. Vanguard, in general, has the lowest overall fees of any issuers in Europe at 0.15 per cent and has cheap offerings for all types of exposures. Additionally, scale is an important factor in offering cheaper exposures, as US firms have more assets under management on average, the pair writes.

A reason for the most aggressive downward pressure on US exposure is because a majority of European ETF assets are in US-focused allocations, the analysts note. Of the continent’s total assets, 34 per cent are in US ETF exposures versus 25 per cent for Europe. Flows continue to show year to year that investors favour US exposures, which is also a by-product of the stronger performance of US markets relative to Europe.

ETFs already compete for low fees but still control only 11 per cent of all fund assets in Europe. “We believe the larger impact is likely to be on active funds in the region, which will be forced to lower fees in response. The average asset-weighted cost of an active equity UCITS fund is 1.26 per cent, a figure that has slowly declined as ETF flows have accelerated. Equity ETFs’ average weighted cost is 22 bps.”

The 12 S&P 500 ETFs in Europe with an ESG focus together hold EUR14 billion in assets, with the largest one, Amundi’s S&P 500 ESG UCITS, accounting for almost 30 per cent of total assets under management. The S500 FP fund (expense ratio: 0.12 per cent) and its Euro-hedged version S500H FP (expense ratio: 0.28 per cent) were last week “moved” from their Luxembourg domicile to Ireland. As a result, the US-focused ETF could potentially benefit from the more favourable tax treaty between Ireland and the US to the tune of EUR10 million remaining annually with the accumulating ETF. 

ETFs domiciled in Europe tracking the S&P 500 index hold EUR170 billion in assets, accounting for more than 10 per cent of the total EUR1.4 trillion ETF market, the analysts write. These do not include equal-weighted, ESG, dividend yield, inverse/leveraged or outcome-focused S&P 500 strategies. Expense ratios for the ETFs in Europe tracking the S&P 500 index range from 0.05 per cent to 0.15 per cent, but the asset-weighted average is 0.08 per cent on annualised revenue of EUR141 million.

The pair concludes that State Street’s reduction in fees of its S&P 500 ETF (SPY5 LN) from 0.09 per cent to 0.03 per cent will reduce annual revenue from EUR4.8 million to only EUR1.6 million. However, they add, this could be made up with revenue from securities lending, which is commencing Oct. 27 in SPDR ETFs Europe I and SPDR ETFs Europe II fund umbrellas, and also act as a loss leader for higher-margin SPDR ETFs. 

Athanasios Psarofagis has taken part in two of the popular ETF Express Off the Record podcasts. Listen to him here:

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