Product Proliferation Is No Bad Thing For Investors
Competition drives down prices. But it can lead to a perception that there is more liquidity than actually exists
We now have about 1450 ETFs listed in Europe and we seem to be getting another two or three new ETFs every week. I am frequently asked if I think there are too many ETFs. My correspondents point out that there are about 20 UCITS ETFs tracking the Euro STOXX 50 Index. They say some investors complain they have too much choice and that this is confusing. My reaction is pretty unequivocal: you can never have too much choice.
The cynic in me suggests that the reason that there are so many ETFs, particularly Euro STOXX ETFs, is because they are so profitable. I know of no charitable ETF issuers operating in Europe at the moment and I am sure all those ETFs are there for a purpose – to make money for the issuer.
Welcoming Competition
As a good capitalist, I always welcome new ETF issuers and new ETFs. I think new ETFs demonstrate that we operate in a profitable, healthy and vibrant market. Many new funds are innovative and show that ETF issuers are responding to their clients’ demands.
Some new ETFs are inevitably “me-too” products but I welcome these as they often come at a lower price than existing products and ultimately this helps bring down the costs for our end clients: something which we should all be happy about.
A great example of competition on fees is the S&P 500 ETFs. Up until 2010 iShares had the only S&P 500 ETF available in Europe and it was fully priced at 0.4 percent. Since 2010, there has been a host of new competitors and you can now buy an ETF for as low as 0.05 percent.
This positive trend is also evident in the China A-share market. Over the last two years we have seen four new physical China A-share ETFs launched as the Chinese government has relaxed restrictions on foreign ownership of mainland shares. Db X-trackers had one of the first and most successful launches with its CSI 300 ETF priced at 1.3 percent. However, each competing new China A-share ETF was priced a little more cheaply until db X-trackers halved the price of their own fund to 0.65 percent. As the China A-shares market opens up further, I would expect competition to drive the prices down more. Maybe one day soon, we will have China A-shares ETFs available for 0.05 percent, like the S&P 500 products.
Misleading Illusions Of Liquidity
However, I think there is a minor downside to having 1450 ETFs in that it contributes to the misleading impression of illiquidity. There is a lot of liquidity in Europe, but we do ourselves no favours by trading across many different national exchanges and currencies or by dealing in the over-the-counter market. This is compounded by having liquidity spread across such a large number of funds.
I think the lack of clarity regarding liquidity could be inhibiting the growth of the European ETF market. ETFs are estimated to have about 13 percent market share of the retail market in the U.S., whereas in Europe the ETF market share is estimated at only 5 percent. The U.S. market is highly liquid with trading volume estimated at $2 trillion a year, vastly in excess of European volumes. This has allowed the development of derivatives on ETFs and a vibrant ETF stock lending industry in the U.S. – something that is absent from Europe today.
The way to ensuring growth of the European ETF market is not to complain about new ETFs or confusing product offerings. Surely we should encourage innovation and competition, while at the same time work on areas of weakness, like liquidity. The beneficiary of all this is ultimately our clients, who end up with a better and lower cost investment portfolio.
