Innovation and downward fee pressure are the hallmarks of Europe’s 24-year-old ETF industry, yet investors willingly allocate billions of dollars in legacy ETFs charging uncompetitive fees – often while lower-cost equivalents are available from the same asset manager.
Just looking at European investors’ two favourite equity Europe – the MSCI World and S&P 500 – both have high and low-fee ETF iterations offered by the same asset manager.
In fact, BlackRock, Amundi and DWS all boast high-fee core equity ETFs housing at least $3bn asset under management (AUM) apiece, while carrying a total expense ratio (TER) between two and three times higher than ETFs from the same provider, tracking the same index.
A prime but far from standalone example of this is $7.3bn iShares MSCI World UCITS ETF (IWRD), which debuted in 2005 with a fee of 0.50% ahead of BlackRock’s acquisition of Barclays Global Investors’ (BGI’s) ETF business four years later.
Within months of the buy-up, BlackRock debuted the now $81.3bn iShares Core MSCI World UCITS ETF (SWDA) with a TER of 0.20%.
Chart 1: High versus low fee ETFs
High fee legacy | Low fee alternative | ||||||
ETF | Fee | AUM | Launch | ETF | Fee | AUM | Launch |
iShares MSCI World UCITS ETF (IWRD) | 0.50% | $7.3bn | 2005 | iShares Core MSCI World UCITS ETF (SWDA) | 0.20% | $81.3bn | 2009 |
Amundi MSCI World UCITS ETF (CW8) | 0.38% | $4.6bn | 2009 | Amundi MSCI World UCITS ETF (MWRD) | 0.12% | $3.1bn | 2024 |
Xtrackers S&P 500 Swap UCITS ETF 1C (XSPU) | 0.15% | $10bn | 2010 | Xtrackers S&P 500 Swap UCITS ETF 1D (XSXD) | 0.06% | $10bn | 2022 |
Amundi S&P 500 UCITS ETF (500U) | 0.15% | $7.4bn | 2010 | Amundi S&P 500 II UCITS ETF (SP5) | 0.05% | $13bn | 2014 |
Source: ETF Stream, as at 24 August
While this is still double the TER charged by what is now the lowest-fee UCITS ETF tracking the MSCI World index, it is less than half that of its older sibling, IWRD, whose fee is also more than double the 2023 asset-weighted average fee of 0.22% for an equity ETF, including thematic and active strategies, according to data from Bloomberg Intelligence.
Why pay over the odds?
Despite this, investors regularly opt for high-fee products, meaning other considerations are given priority ahead of fees.
Kenneth Lamont, senior fund analyst at Morningstar, noted funds can track the same index but offer different investment propositions.
In fact, Amundi has a suite of MSCI World tracking ETFs launched between 2006 and 2024 domiciled in different jurisdictions, with different replication methodologies and likely serving different clients. Each ETF houses at least $3bn, with TERs ranging from 0.12% to 0.38%.
Peter Sleep, investment director at Callanish Capital, agreed that nuances such as physical and synthetic replication represent “real economic differences” between products, however, he argued justifications for fee disparities are often less meaningful.
“Often the reasons for the fee premium are bogus, for instance one ETF is income and is therefore more expensive and the other is accumulation and cheaper,” Sleep said.
“The issue of high fee and low fee ETFs has been around for some time and in a lot of cases may have been deliberately created by the ETF sponsors to protect high fee income products.”
Commenting on the launch of the $961m iShares Broad $ High Yield Corp Bond UCITS ETF (HYUS) in 2022, Sleep called the launch “a clever revenue protection exercise” for appealing to fee-sensitive investors, while $5.5bn remains in an equivalent BlackRock ETF with a fee 30 basis points (bps) higher.
A justified allocation
Looking at the investor perspective, there are legitimate cost considerations beyond fees which support a case for remaining in high-fee legacy ETFs.
“Fees are just one consideration when choosing an ETF,” Lamont said. “Tax advantages or replication costs can outweigh fee differences, as seen with swap-based versus physically replicated S&P 500 ETFs.”
He added when switching funds, potential brokerage costs, tax liabilities and the need to perform thorough due diligence might outweigh potential fee savings.
Countering this, Sleep said large-scale investors can contact their authorised participant and arrange an in-specie transfer – or back-to-back redemption and creation – to allay concerns surrounding bid-ask spreads, tax or brokerage costs.
While acknowledging those looking to short an ETF may prefer higher-fee and more liquid ETFs, Sleep argued investor complacence is the driver of assets housed in costly ETFs.
“The main reason the higher fee ETFs remain is largely customer inertia. At the margin there may be some tax issues or maybe some investors value the higher on-screen liquidity, but I am unconvinced.
“There has been enough extreme volatility over the last three to four years to realise enough losses to offset any gains on these ETFs and it is not that these ETFs have been super profitable.”
However, it is hard to contest some of the use cases for scaled, high-fee ETFs targeting niche exposures.
“For ETCs, sector or single-country funds, which are often used tactically, trading costs can matter more than annual fees,” Lamont added.
Supporting this, he highlighted the $3bn Gold Bullion Securities ETC (GBS) which remains popular due to low trading costs, despite its 0.40% fee being almost four times that of Europe’s cheapest gold ETCs.
Lamont also argued fund size plays a “crucial” role for the cost and access to niche exposures including single-country emerging market ETFs.
“Larger funds often achieve better tracking fidelity and a new, cheaper entrant might underperform due to lack of scale.
“Access restrictions and platform availability can also limit investor choices, with smaller or newer funds often having less exposure and higher switching costs.”
Such arguments go some way to explaining why long-standing single country ETFs with fees ranging from 0.74% to 0.85% continue to house hundreds of millions of dollars while some with fees as low as 0.10% struggle to reach scale for economic viability.
Similar eccentricities also exist for specialist, longer-term allocations such as future themes, where choosing the right – and a scalable – investment strategy is a stronger determining factor in investor outcomes than fees.
Lamont concluded: “While fees are important – the most reliable predictor of future fund performance we have – there are many legitimate reasons why investors may remain in more expensive equivalent funds.”
Sleep suggested regulations such as Consumer Duty should mean UK consumers should be directed to lower-cost products, where possible.
“Ultimately though, it is up to the ETF buyer to ensure that she gets the best price,” he said. “For all the regulation, caveat emptor remains important in finance and not something you wear around your neck.”
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.
