The ongoing price war in smart beta ETF fees has the potential to negatively impact the credit ratings of traditional active asset managers as well as smart beta ETF providers, according to credit rating agency Moody’s.
Goldman Sachs will join providers Vanguard, BlackRock and Charles Schwab by offering a smart beta ETF for less than 10 basis points.
Stephen Tu, senior analyst at Moody’s commented: “The ETF price war beyond vanilla ETFs is credit negative for traditional active players entering the smart beta realm, including Legg Mason, Franklin Resources and Janus Capital Group. It is also credit negative for existing smart beta managers including Invesco, BlackRock, State Street, and WisdomTree, which are likely to respond with price cuts on existing products.”
Traditional active managers faced with declining market share have been shifting their attention to smart beta products, hoping to use their expertise in a product category with fees between that of traditional active mutual funds and plain vanilla index products. To date, the majority of US-listed smart beta ETFs have been priced between 0.24% and 0.39%, according to Moody’s research, which is approximately half the price of actively managed equity funds.
Moody’s reports that the plain vanilla ETF category has experienced a severe price war in which product pricing has migrated towards zero, and this aggressive price competition is now filtering up into the smart beta category.
Charles Schwab, iShares and Vanguard already offer a number of single factor smart beta ETFs costing under ten basis points that give exposure to the value and high dividend factors, the largest being the Vanguard Value ETF (VTV) which has assets of $33 billion with a TER of 0.06%.
The cheapest low volatility and momentum ETFs available are both issued by SPDR ETFs, the SPDR SSGA US Small Cap Low Volatility Index ETF (SMLV) which has $206 million in assets and a TER of 0.12%, and the SPDR S&P 1500 Momentum Tilt ETF (MMTM), which has assets of $21m and also has a TER of 0.12%.
The cheapest fund giving exposure to the quality factor is the $3.5bn iShares Edge MSCI USA Quality Factor ETF (QUAL) which has a TER of 0.15%.
In addition to these single factor strategies, Goldman Sachs Asset Management (GSAM) currently offers a multi-factor fund with a TER of just 0.09%. The Goldman Sachs ActiveBeta US Large Cap Equity ETF (GSLC) was launched in September 2015 and has assets of $2.4bn.
Tu continued, “GSAM is now solidifying a price point below ten basis points for smart beta strategies. Individual investors are becoming increasingly cost conscious and discerning about the value they receive for the management fees they pay. Accordingly, the segment of the fund industry receiving the most flow has been the sub-ten-basis-point category.”
Tu envisages a potential future in which smart beta products are unable to command meaningful premiums over vanilla index products. As a result, traditional asset managers hoping to utilise smart beta ETFs as a way of keeping fees high might be disappointed.