Skip to main content

More for less: Stateside ETFs have just got cheaper


BlackRock announced today that is cutting its fees on its iShares Core (US) range.  Investors can gain broad market exposures for 4-14bp.  This compares to 7-25bp for the iShares Core (UK) range.
A diversified multi-asset 70/30 ETF portfolio will cost US investors can 8bp (that’s 8 cents per $100), compared to 14bp for a similar strategy for UK investors. Might the UK follow suit? We’ll see.

Big dreams
The cuddly  caption announcing the move says “Smaller Fees means Bigger Dreams”, which is warm-hearted.  But it’s also sort of fair.  Today’s retail investor has more access to breadth and depth of international markets than our parents ever dreamed of (if they ever dreamed of that sort of thing).

What does this mean, apart from being cheaper?
Well firstly, Moore’s law applies to ETF pricing & capacity as much as it does to semiconductors.  That’s not  new or surprising.  But the sustained deflationary pressure on fund fees is forcing the convergence of institutional and retail investment offers.  This will create pressures on asset managers that do not adapt.

Adapt to what?
The quest for elusive alpha from security selection looks like the right way of solving the wrong puzzle.
The puzzle to solve is how to design asset allocation strategies to help investors achieve their desired or required outcome.  Put differently, investment houses need to offer solutions (or “dreams”?), not products (“funds, OEICs, ETFs”).

Who are the winners?
Market access has basically become commoditised, so the only value in the value chain is in distribution (having customers), and solution design (giving them what they want).
Asset managers and financial adviser that embrace this new reality should flourish. Those that linger on in yesteryear’s product based world will gradually lose momentum.

NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.

This article has been written for a US and UK audience.  Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers.  For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.  For more information see www.elstonconsulting.co.uk Photo credit: coinquest.com Chart & Table credit: N/A

Comments

Popular posts from this blog

"The Magnificent Seven": key asset classes for a diversified ETF portfolio

"Asset allocation is not everything. It's the only thing." One of the harshest lessons of the Global Financial Crisis was that when the going gets tough, correlations trend to one, giving even diversified investors very few places to hide.  It wasn't about whether or not you got burned, it was a more a question of degree. While there's a time and a place for active stock selection, from a portfolio construction perspective, it's the active management of the overall asset allocation that affects the outcome. Using ETFs for portfolio construction The growing popularity in Exchange Traded Funds is in part because of their elegance in providing broad, liquid, efficient and cost-effective market access to most major asset classes with a single trade.  We now have a broad range of building blocks with which to construct a diversified portfolio. As a result, the problem for investors has shifted from "How best can I access a broad choice of markets?", to &q…

Advisers should celebrate the launch of Vanguard D2C

After equal measures of anticipation and fear, Vanguard has finally unveiled its D2C offer for the UK retail market.  Advisers should celebrate.  Sounds contradictory? Not at all.
What’s being offered Firstly, a quick look at what is being offered.  Vanguard is offering direct access to its funds through with the option of holding them through an ISA or JISA, with a SIPP to follow.
Of most of interest (or rather for most ease), from a consumer perspective, will be the “do it for me” type of asset allocation funds that provide an entire portfolio management solution within a single fund. 
Specifically, the target risk funds, known as the Vanguard LifeStrategy funds, (with a fixed allocation to equity, e.g. 60% equity), and the target date funds, known as the Vanguard Target Retirement Funds (with a target date to match expected retirement date).
For these portfolio management funds, the OCF is, for example, 0.22% (the Vanguard LifeStrategy 60% Equity Fund).  Adding on some 0.15% admin…

Closet index funds get a kicking

UK regulator forced a number of asset management firms to pay £34m compensation to customers for “closet indexing”Closet indexing means funds are presented as higher cost active, but actually just hug their benchmarksWe estimate there is €0.4 to €1tr of assets in “closet index” funds in Europe, depending on what criteria are applied.  Either way, fund houses have been warned
“Mutton dressed as lamb” is a derogatory old saying of something or someone that’s dressed up to look better than it is.  In olden days, some dodgy butchers would dress mutton up to look like lamb to get a higher price.  I’ve got nothing against mutton.  It offers good value for money and does a nutritious job.  But I don’t want to be given one thing when sold another. Some “active” funds that actually hug an index is another form of misrepresentation.And this month, the UK regulator got tough forcing a number of fund houses to pay £34m compensation to customers overcharged in closet index funds. As this is the fi…