BlackRock and BetaShares slash fees in Australian ETF price war

As the price of virtually all goods and services seems jammed in an upward spiral, it is very rare to see prices falling anywhere.

Which is why it is more than a little surprising – but very welcome – that something of a price war has broken out between some of the biggest fund managers operating in Australia.

It is even better news that the race to cut fees applies to some of the most sought after investment funds – exchange traded funds (ETFs) covering the biggest companies on the Australian stock exchange.

BlackRock tries to boost inflows

It all started when BlackRock – the world’s biggest asset manager – decided to slash the annual fees on its flagship Australian indexed share investment iShares ASX200 ETF (ASX: IOZ) to just 0.05%, down from 0.09%.

That is a big reduction and means that investors are paying just $5 for every $10,000 invested in the biggest Australian shares, which is a lot better than the former $9.

Indeed, compared to the sorts of fees around the $100 mark charged by most active fund managers – most of which struggle to consistently outperform the ASX 200 – that is a real bargain.

Fees are very important to investment returns, particularly over the long term, so investors rightly concentrate on keeping them as low as possible, given they are one of the few things that can be controlled to boost overall yields.

Betashares joins the war

The move by BlackRock briefly undercut the acknowledged market leader on fees for an ETF, Australian operator Betashares, which has built quite a following counter-punching with the global giants.

However, Betashares did not give up without a fight and quickly dropped the fee on its Australia 200 ETF (ASX: A200) from 0.07% to just 0.04% a year – equal to $4 a year for every $10,000 invested.

The slashing of fees comes as the big ETF players increasingly compete on price to cover passive investment flows, which can be quite sensitive to fees.

So far there is no sign of the other big player – Vanguard – joining in the fee war although it should be pointed out that its Vanguard Australian Shares Index ETF (ASX: VAS) covers a wider number of stocks, being an index fund on the ASX 300.

That tends to add some higher growth/higher risk smaller companies to the investment but even so, with a fee cost of 0.1% or $10 for every $10,000 invested each year, investors are paying more for adding the special sauce of an extra 100 companies.

That broader market coverage has made Vanguard an incredibly popular fund with investors, so perhaps the pressure to cut fees is not so pronounced compared to BlackRock’s iShares, which has been struggling to maintain its share of fund inflows.

Vanguard known for low fees

Vanguard is known for charging very low fees for many of its other index ETFs, with the most famous example being its Vanguard US Total Market Shares Index ETF (ASX: VTS), which covers the entire US share market for the bargain basement price of just 0.03% or just $3 for every $10,000 invested per year.

The keen competition between the big ETF players is great news for investors and comes despite significant growth in the number being offered in Australia – with a host of new thematic offers coming from players including Vanguard, BetaShares, Blackrock and VanEck, to name a few.

While the competition has been hot to offer the latest and greatest thematic ETF, the overall pool of money flowing to ETFs is slowing a little.

Overall ETF assets under management grew 4.9% to $123.1 billion in the past year, which has led to a sharpening of the pencil for the big players as they try to grab as many investors for their vanilla index funds as they can.

The thematic ETFs – while usually much smaller and a more niche offering than the big index hugging funds – are more profitable because they can charge higher fees for their bespoke indexes.

Scale and simplicity are key to lower fees

So how do the big ETF players manage to charge such low fees on their index investments?

The answer is basically scale and simplicity.

The large size of the funds means that the cost of administering the ETF and buying the shares as required gets smaller all the time.

Index funds are also simple because they are effectively mechanical and at the end of each day a computer can rapidly work out how many of each company shares need to be bought or sold to accurately shadow the appropriate index.

There is literally no fund manager analysing company reports and dreaming up ways to outperform the market, just a simple but difficult to beat system of buying more shares in companies that are growing bigger and selling down shares in companies that are shrinking in value.