ETF giants Betashares and Vanguard set to take on big industry super funds

So far, one of the more interesting deals to happen this year has passed almost without comment but it sets up a new and growing force to provide competition in the superannuation space.

In the deal, local Australian exchange traded fund (ETF) operator Betashares bought Bendigo and Adelaide Bank’s (ASX: BEN) superannuation business.

While Bendigo Superannuation is a relative minnow in the $3.5 trillion Australian superannuation sector with $1.4 billion in funds under management and more than 19,000 members, it still represents a strong combination of a major ETF operator and a fully-fledged superannuation vehicle.

Of course, there is another similar combination that has received much more attention – low-cost international ETF provider Vanguard’s push into having a super product.

At last count Vanguard had signed on about 10,000 members and gathered $500 million in funds under management but is set to grow very quickly from here onwards as more advisers start to sell its offerings.

Betashares starting slightly ahead

So, at the moment Betashares seems to be slightly ahead in the race for super members and funds under management but the really big competitive battle will be between the two ETF providers and their so far tiny superannuation businesses and the massive industry funds that dominate the Australian scene with around $1.2 trillion of assets under management.

Obviously Betashares and Vanguard are coming from a very long way behind the industry fund behemoths such as AustralianSuper, Australian Retirement Trust, Retail Employees Superannuation Trust and HOSTPLUS but they have some important advantages that could also feed into a better and more competitive choice of funds for super users.

While the giant industry funds obviously have significant benefits of scale, Betashares and Vanguard both originate a wide range of ETF’s which give very low-cost exposure to a range of market indexes.

Some of these ETF’s offer exposure to the ASX 200 and ASX 300 for very low costs, as well as many other local and offshore markets and sectors.

For example, Betashares ASX 200 ETF (ASX: A200) charges just 0.04% a year in fees and Vanguard’s ASX 300 ETF (ASX: VAS) charges just 0.07% a year.

With wholesale access to these and many other ETF’s representing a range of local and overseas markets and asset classes, both Vanguard and Betashares should be able to offer a range of pre-mixed super products with very low fees that should also be highly competitive on the investment performance side over time.

Industry funds grew due to not-for-profit advantage

The big play that the industry funds have used to grow so large is that they offer lower fees because of their not-for-profit structure – an offer which over time has eroded the market share of for-profit funds substantially.

While both Betashares and Vanguard are effectively for-profit funds, their ultra-low fees by using passive ETF’s should still produce highly competitive products on the cost and performance side.

It is always difficult to imagine changes that could occur in the future.

However, you don’t have to look back that far to see that the super market in Australia was once dominated by names such as AMP (ASX: AMP) and National Mutual (later AXA), with industry funds being the tiny tiddlers in the market.

It is an organic and ever-changing field and despite very small beginnings, it would be foolish to bet against Betashares and Vanguard building significant superannuation businesses over the long term.