State Street's Fee Cut in Europe May Spark Price War

State Street Global Advisors grabbed headlines when it slashed fees on its S&P 500 ETF to 0.03% last month.

Following the move, the SPDR S&P 500 UCITS ETF (SPY5) became the cheapest ETF in Europe to track the flagship U.S. equities index with a total expense ratio of 0.03%.

It undercut its closest rival, the Invesco S&P 500 UCITS ETF (SPXS), by two basis points and came soon after it announced the product would now be eligible for securities lending, potentially boosting investors’ returns even further.

Fee War in Europe

The announcement promises to spark a fresh fee war in Europe with SSGA’s rivals such as BlackRock, Invesco and Vanguard caught off guard by the move.

Investors will have to consider several factors, including the cost to switch and the overall charges figures of the differing exchange-traded funds.

The question is, does SPY5’s fee cut move the dial for fund selectors? Here is the answer from three fund selectors.

Dan Caps, investment manager, Evelyn Partners

Lower fees are almost always a good thing for our clients. We are constantly looking for ways to improve the cost efficiency of our portfolios, and whilst the devil is sometimes in the detail, headline ongoing charges figures obviously form a big part of this.

However, it is not the be all and end all and you need to consider liquidity and spreads, as well as tracking error and replication methodology—but with SSGA being a huge asset manager, SPY5 a well-established ETF and the underlying market being extremely liquid, the instrument ticks a lot of boxes.

Securities lending is also an area that investors may want to look closely at as the policy can vary quite significantly across houses and instruments.

It will be interesting to see how the other big players in the markets react to the move and how willing and able they are to compete on price. Existing holders of their instruments are likely to want clarity on this sooner rather than later.

Wayne Nutland, fund manager, Premier Miton Investments

SSGA’s move is certainly bold, and coming after a relatively quiet period for price competition in core beta exposures, it will be interesting to see if the move sparks similar reductions from other issuers.

The cut has been made possible by SSGA’s inclusion of the ETF in its securities lending program, which should enable the firm to make some additional revenues, even though securities lending revenues are split with the ETF on a 75:25 basis in favor of the ETF. Securities lending is fairly standard amongst UCITS ETFs today.

While for some investors swap-based S&P 500 exposure will remain preferred due to the withholding tax benefits, for new money requiring physical exposure 0.03% would seem like a fairly clear choice. Switches will need to consider switching costs but the S&P 500 is typically a very low-cost exposure to trade.

Nathan Sweeney, chief investment officer of multi-asset, Marlborough

SSGA has caught the attention of fund selectors across the country with the dramatic cost reduction of SPY5 to a competitive three basis points. SSGA is a pioneer in this space, while Vanguard and BlackRock have been the disruptors. Interestingly, the fee cut is the reverse of the U.S. market where Vanguard and BlackRock are the clear market leaders on fees.

Fund selectors need to consider the quality of tracking before switching. These products are going to be broadly similar, but you will still find some kind of slippage within the tracking due to corporate actions and index rebalancing. Technology will be important in reducing slippage.

From our perspective, we will definitely look at SPY5 but will be asking questions about fees such as legal, regulatory and listing costs, as well as the licensing fees for indices. It is an extremely interesting development that warrants closer inspection.