BlackRock: Slashing ETF fees spur growth

By Elizabeth Fry

Exchange-traded fund providers continue to dismiss suggestions they are fighting a price war and claim that rolling out low-cost building blocks in core areas is business as usual.

In recent years, ETF providers have launched a ton of such market products, so it was no surprise when the world's biggest investment manager, BlackRock, announced it will cut the annual management fee of the iShares S&P/ASX 200 ETF from 0.09 per cent to 0.05 per cent and the iShares Core Composite Bond ETF from 0.15 per cent to 0.1 per cent.

Rival Betashares swung into action and promptly cut the annual management fee of the Betashares Australia 200 ETF by three basis points from 0.07 per cent to 0.04 per cent. Now the market is poised for a response from Australia's largest ETF provider, Vanguard.

BlackRock's deputy head of Australasia Jason Collins says fees are just one of the major considerations for investors, and further downward pressure on core ETF costs is in line with global norms.

"However, it's not just a question of cutting, cutting and cutting fees," he adds.

"It's more that the core areas lend themselves to economies of scale and, as a result, to lower prices."

Despite press reports about BlackRock ramping up a price war, Collins argues that since large index and ETF providers have reached a certain level of scale, they can afford to pass on the scale benefits to advisers and investors to deliver lower-cost core ETFs.

He adds that the wealth market should also see a narrowing of pricing with the same scale benefits enjoyed by the institutional space.

"Core offerings in the broader Australian ETF market probably weren't as low as they could have been, particularly when compared to the institutional space."

Of course, Collins is betting that narrowing the price gap between retail and institutional investors will drive more flows into the ETF market in Australia. Moreover, the immediate fall in revenues from the lower fees will be matched by faster asset growth in time.

Collins says passing on some of those benefits to advisers and investors is entirely appropriate in such a competitive and fast-growing competitive market.

"Hopefully, this helps grow the ETF market which is still under-penetrated in terms of the percentage of assets on the ASX that are ETFs versus other markets. For example, ETFs represent only around 4% of equity assets in Australia, compared to over 10% in the US."

Adding new ETFs

Investors' move to use ETFs as a source of tactical alpha is a bigger story.

What's more interesting is the move by advisers and investors to look beyond single security or fund selection to holistic portfolio construction.

Collins says lower fees mean investors will now have "optionality" when deciding where to allocate the additional "fee budget" to add more complex or active exposures to their portfolios.

In the institutional space, he says, organisations are already employing a low-cost core strategy, whether through in-house index investing, increasing index exposure to third-party managers, or via lower tracking error/lower-cost quantitative strategies.

"They might use that fee budget saving in higher cost active or alternative exposures, and we also see the use of higher cost tactical ETF exposures, for example in areas such as China bonds or high yield debt.

Aside from being used to generate alpha, ETFs are used as an alternative to investing in derivatives.

Collins points out that pension funds and asset managers are increasingly using ETFs instead of futures, particularly in market cycles where funding markets are expensive. In short, the total cost of ownership of an

ETF can sometimes be lower than derivative contracts when considering things such as the roll cost of futures which can vary significantly over time.

Meanwhile, the fragmentation of the advice industry has resulted in a larger number of smaller independent financial advisors looking at cost efficiencies in their business to pass on to their clients.

"I think they would welcome this trend or these recent moves because it helps their businesses and hopefully helps grow the advice and ETF markets."

Partnering up

BlackRock - which manages almost $200 billion on behalf of Australian and New Zealand investors - is at the forefront of the push to partner with the retail, public sector, and industry funds, especially those seeking to develop a global presence and open offshore offices.

Crucial to the partnership model is the demand from clients for a whole-portfolio approach rather than having funds pitch an individual exposure or strategy.

"These are deep engagements. They are resource-intensive, require a great deal of trust, and you need to have aligned values and purpose," Collins adds.

"If you go back even five years, BlackRock was probably seen more as sleeve or product provider, whereas now we are respected as an industry participant," he says.

"Certainly, there are areas where we provide solutions in certain asset classes, but you know, gone are the days where you have an idea around a product and mount a campaign."

Technology, information sharing and local market insights across the globe are what it's all about now.

Collins says as super funds get larger and more specialised, they recognise that they are leaders in a range of investment areas but may reach out for additional context or resources where they do not have a competitive edge.

"They are pretty diverse organisations and the large funds are now looking for insights into areas in which they may not have global expertise or areas of high interest such as trends around ESG and engagement with companies given they are often large direct shareholders."

The BlackRock executive said technology is a particularly strong focus as super funds gain scale and seek to improve member engagement.

"On the investment management side, technology which enables whole portfolio management and risk capability at scale will be continued investment areas."

"Further, depending on the outcome of the Quality of Advice Review and the degree to which super funds venture further into the advice landscape, servicing members in a more holistic way will require better data and systems.

"Consequently, the technology surrounding advice and tools around retirement is likely to be a real focus for them over the next five years."