Old Mutual’s GSR Challenges VWO On Price

June 01, 2010

Borrowing a page from Vanguard, Old Mutual decides to cut the price on its emerging markets ETF in the hopes of gathering assets in one of the fastest-growing pockets of the investment world.

Old Mutual’s GlobalShares FTSE Emerging Markets Fund (NYSEArca: GSR) is now the cheapest emerging markets ETF available to U.S. investors, after the company slashed its annual fees to 0.25 percent in hopes that a low price will drive asset growth.

GSR’s cost now is just below the Vanguard Emerging Markets ETF (NYSEArca: VWO), which is 0.27 percent. Other major ETFs in the space, such as the mammoth $35 billion iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) and the SPDR S&P Emerging Markets ETF (NYSEArca: GMM), cost 0.72 percent and 0.59 percent, respectively.

This isn’t the first time South Africa-based mutual fund provider Old Mutual has changed fees to entice investors. When GSR first launched in December, it came with an unprecedented zero percent expense ratio through Jan. 31. After that deal ended, the fee rose to 0.39 percent. This new price cut, which will last at least 12 months, might be extended indefinitely if assets flow in, the company said.

“When it comes to ETFs, it’s critical to have a low cost and a low tracking error,” Old Mutual CEO Tendai Musikavanhu told IndexUniverse. “We are offering investors added value by cutting the total expense ratio. But we will also work to have a very low tracking error.”

Challenging VWO And EEM

GSR has $67 million in assets, a fraction of VWO’s $24 billion and EEM’s $35 billion. Competing on price has worked for VWO against EEM over the past few years. If current trends continue, VWO could surpass EEM in assets by the end of the year, helped also by the fact that its replication strategy has delivered superior returns to EEM’s sampling strategy.

Old Mutual hopes GSR will achieve low tracking error through a sampling strategy of its own, which means it won’t own all the stocks in the index. Musikavanhu said that so-called optimization strategies can minimize deviations from the index if the correct mathematical and analytical tools are used.

“Keeping the tracking error low demands a mix of art and science,” Musikavanhu said. “In the end it’s all about competition, and we believe we have something valuable to offer.”


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