The primacy of fees in the total cost of ownership discussion is warranted, however, this is not the case for asset allocators tactically trading niche markets where liquidity costs are front and centre.
This is evident in more esoteric emerging market and private equity exposures, where BlackRock runs the largest ETFs within several product classes despite the products carrying fees sometimes more than three times those of rival strategies.
The fact these products still garner investor favour owes to their scale, with larger ETFs often able to track their underlying more efficiently and crucially enable investors to enter and exit positions at lower cost.
Illustrating this, the $748m iShares MSCI AC Far East ex-Japan UCITS ETF’s (IFFF) best average at touch bid-ask spread on a lit venue through August was 10.6 basis points (bps), according to data from big xyt, whereas the equivalent spread on the $153m HSBC MSCI AC Far East ex Japan UCITS ETF (HMAD) was almost three times as wide at 26bps.
Likewise, the $845 iShares Listed Private Equity UCITS ETF (IPRV) outguns the $322m FlexShares Listed Private Equity UCITS ETF (FLPE), with a bid-ask spread of 12.3bps versus 35.5bps last month.
Delving into single country emerging markets, the $253m iShares MSCI Brazil UCITS ETF (IBZL) boasted a spread of 38.8bps versus 50.8bps for the $33m Franklin FTSE Brazil UCITS ETF (FLXB)
While fee wars have dominated headlines in core exposures – with global equity ETF expense ratios falling from 0.50% to 0.07% within two decades – the conversation in more esoteric markets remains fixed on asset allocators being able to trade in and out with quickly and at low cost.
This makes sense given the relative difficulty of accessing liquidity in more niche exposures, even for large funds.
Weixu Yan, head of passives at Close Brothers Asset Management, commented: “A $2bn India equity fund will always have a wider bid-ask spread than a FTSE 100 or even a FTSE 250 ETF.”
For instance, he noted the $27m Invesco FTSE 100 UCITS ETF (S100) has a tighter spread than the $2.6bn iShares China CNY Bond UCITS ETF (CNYB), despite a considerable disparity in scale.
However, the additional costs associated with accessing these markets on a tactical basis often pale against long-term holding costs, which may be prohibitive for buy-and-hold allocations.
Demonstrating this, the Xtrackers S&P Select Frontier Swap UCITS ETF’s (XSFR) benchmark rose 20.4% between the ETF’s inception in January 2008 and 6 June this year, while XSFR returned -13.3%, meaning it lagged its benchmark by 33 percentage points since launch.
In sum, accessing liquidity in niche markets is an expensive venture, even within ETFs. For those looking to capitalise on tactical opportunities efficiently, the not-so-secret recipe for success is scale.
