The copycat game has long been a part of the ETF industry.
Small ETF providers come up with new ETF ideas, take the risk, prove they can work. Then…wham! Along comes a bigger ETF provider, who copies their ideas and takes their business.
Medium-sized ETF providers copy small ETF providers. Then giant ETF providers copy medium-sized ones.
Tuna eat plankton. Then sharks eat tuna.
The Australian ETF market is small and relatively upstart – with just $65 billion under management. However, fund managers in Sydney are starting to play the ETF copycat game all the same – of the kind that has been prevalent for in Europe and the US for a decade.
TickerFund NameAssets ($M)Management fee (p.a.)QUALVanEck Vectors MSCI World ex Australia Quality ETF1,0820.40%QHALVaneck Vectors MSCI World ex Australia Quality Hedged ETF1930.43%TickerFund NameAssets ($M)Management fee (p.a.)QLTYBetaShares Global Quality Leaders ETF500.35%HQLTBetaShares Global Quality Leaders ETF - Currency Hedged1.50.38%
The latest iteration comes from VanEck and BetaShares – two successful ETF shops.
VanEck listed two quality factor smart beta ETFs some years back – one of which was currency hedged, one of which was not. The funds have done well, luring in over $1 billion in assets.
BetaShares saw the growth and listed quality ETFs of their own – and at lower fees. The currency hedged version of BetaShares’ quality ETF – BetaShares Global Quality Leaders ETF (HQLT) – began trading on the ASX today.
Fund Name1 Month Total Return1 Year Total ReturnBetaShares Global Quality Leaders ETF4.1%25.7%SPDR MSCI World Quality Mix Fund1.3%10.2%VanEck Vectors MSCI World Ex-Australia Quality ETF2.4%23.7%
Copycat products can be a great thing for investors. They help drive prices down and transfer wealth from fund managers to investors. They also have the advantage of refining investment strategies with the benefits of hindsight.
In these aspects, BetaShares quality ETFs have worked. They are both cheaper – if by a small margin. While QLTY’s investment strategy – which focusses on return on equity and Japanese stocks – has outperformed VanEck’s, which focusses on balance sheet strength and US businesses.
However, should investors spare a thought for VanEck, whose idea has just been used?
On the surface at least, investors might be disinclined to sympathise. BetaShares and VanEck are fierce rivals. Corporate rivals of all shades and stripes tend to take each other’s good ideas. And QUAL still has $1 billion under management, making it highly profitable.
Furthermore, as BetaShares would be the first to point out, VanEck has copied other ETF providers itself. The group’s US parent took its successful video games ETF – ESPO – from a small company called ETF Managers Group.
BetaShares, meanwhile, has taken its turn as the toad beneath the harrow. BlackRock – the great white shark in the ETF industry – copied BetaShares idea for a cash ETF back in 2017. (Admittedly, in a very different structure).
However, there may be cause for sympathy elsewhere.
Copycatting can be a good thing if it lowers prices – yes. But it can be a bad thing if it undermines innovation.
In Europe and the US – where ETF houses are well-practiced at the game of copycat – ETF innovation has been blunted. ETF issuers know before they even launch a product, that if their new idea gains traction, the bigger issuers will copy it. Accordingly, many have reigned back product development. Innovation has accordingly been stifled.
A good recent example coming out of Europe is HANetf’s Kuwait ETF (KUW8). The fund gathered investor interest and hit $50 million at a decent click. Invesco, seeing this, listed a copycat of their own (MKUW).
My worry in all this is that something similar could happen in Australia. And that it is too early for this type of competition and fee compression. For this reason, there is some cause to sympathise with VanEck.
So what then is to be done?
To my mind, the best thing to do is for Australian ETF providers to list funds with low fees at the outset. This way investors get a good deal and ETF providers are more inoculated from under-pricing. On this score, I think a good starting fee for global shares ETFs is around 30-35 basis points. That makes profitability lower – sure. But the fees are high enough to keep breakeven AUM realistic and justify the risks.
There are no real intellectual property protections for ETFs. So one suspects the copycatting will continue. And as always, the copycatting is particularly dangerous in down markets – like the kind we have just had – as the lock-in effect of capital gains taxes gets washed away.
Competition is to be welcomed. But it must not come at the cost of innovation.
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