The Cost Of Buying Funds In Europe Vs. America

September 18, 2009

Deborah Fuhr of Barclays Global Investors has an interesting new study out, which finds that assets in European ETFs are swelling, breaking all-time highs.

In August, European ETF assets soared to a new record of US$192.1 billion. That broke the old high-water mark, which was set the previous month. It also represented a nearly 35% rise in assets so far this year. (By way of comparison, the U.S. has seen assets increase to US$607 billion, up about 22% in 2009 through August.)

There were 751 ETFs trading in Europe entering September vs. 710 in the U.S. There were also more providers in Europe (33) than the U.S. (22).

Both markets are similar in that a few companies control the bulk of the market. In Europe, market share is even more concentrated than in the U.S. The Big Three controlled a combined 76.6% of European ETF assets at the end of August. iShares led with 39.7% of the market, followed by Lyxor with 20.7% and db x-trackers with 16.2%.

But a side note here. Two bit players – Source Markets and ABN Amro – have 21 new ETFs each in the works. The only provider even remotely close on this count is EasyETF with seven in its pipeline.

In the smaller European exchange-traded products market (US$14.73 billion in total net assets), ETF Securities is planning 15 new ETPs. With US$12.7 billion in assets under management, it dominates that segment with about an 86.2% market share.

From an investment standpoint, however, perhaps the most glaring differences between the U.S. and Europe relate to costs. While European ETFs have slightly greater expense ratios on average than those in the U.S., the gap between open-end mutual fund fees casts a much bigger shadow.

For example, the BGI report lists the expense ratios of actively managed domestic equity mutual funds in Europe as averaging 1.75%. The same category in the U.S. had an average ER of 1.41%.

Now, contrast that with the average ERs for ETFs. In Europe, the expense ratios run anywhere from 0.28% to 0.37% for domestic stock exposure using index-based ETFs. In the U.S., the report lists average ERs for similar ETFs – depending on category – as ranging from 0.12% to 0.34% for index-based domestic ETFs. (On both continents, the broader the fund, the lower the costs; more focused sector funds are priced higher.)

So it’s clear that in Europe, the expense gap between choosing an active stock mutual fund and an index-based ETF is greater than in the U.S. That gives European investors even greater benefits when making the switch from active mutual funds to ETFs.

No doubt many ETF investors used to be individual stock investors. But on a purely cost-benefit basis, a lot of mutual fund owners are still likely to find the grass is greener on the ETF side of the fund investing fence.



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