BetaShares shirtfronts Vanguard

by , 6th April 2018

Aussie issuer BetaShares is listing the cheapest Australian ETF, in an effort to undermine the big three.

Aussie issuer BetaShares is listing the cheapest plain vanilla ETF in Australia, rolling out an ASX 200 equivalent tracker at half the price of the existing Vanguard and BlackRock products.

The new fund, called the BetaShares Australia 200 ETF (A200), will charge 7 basis points, compared with 14 basis points charged by Vanguard’s Australia Shares ETF, the current cheapest.

The launch represents one of the few instances of a small local issuer underpricing the dominant international players, sometimes called the “big three”: State Street, Vanguard, and BlackRock. And represents a rare example of a local issuer meeting the fee war on the front foot.

It also suggests the ETF fee war, which until now has concentrated in the US and Europe, is setting up tent in Australia.

“We have the scale now to launch Australia’s cheapest ETF,” said Alex Vynokur, BetaShares’ CEO, at an event in Sydney on Thursday night.

“The first stage of the ETF market evolution has been very much driven by the retail market.

“If we look around the world we see that institutional investors require institutional solutions. This product is targeted at institutional investors.”

Mr Vynokur did not explain why a slightly cheaper version of existing plain vanilla ETFs would open vectors into the institutional market. The audience he spoke to at the event consisted heavily of institutional investors.

While ETFs have existed in Australia since 2001, fees on plain vanilla funds have declined at a glacial pace. The slow decline has meant that Australia-tracking ETFs are cheaper in New York than in Sydney. Franklin Templeton’s Australia tracker (FLAU), listed on NYSE, costs 9 basis points – cheaper than anything available on the Australian Stock Exchange.

While cheaper Australia-focussed ETFs exist in New York, Aussies buying them are forced to pay the 15% dividends tax that the IRS puts on non-US residents, meaning any gains on fees are lost on tax.

“The lowest cost ETF for Australia right now is in New York. We think it should be in Australia,” Mr Vynokur said.

BetaShares will achieve its cost efficiency in part by using a Solactive index. Solactive is a German index house that charges a flat rate rather than demanding a share of AUM, as the dominant index providers do.

It is also achieved by putting cost pressures “everywhere”, a source close to BetaShares indicated.

What the breakeven AUM will be for a fund this cheap remains to be seen. An independent source contacted for comment by ETF Stream suggested that given BetaShares scale and backing by Mirae Asset (the Korean asset manager that majority owns BetaShares), the company could break even with less than A$100 million under management.

The big three issuers’ response also remains to be seen. If the US and UK are any example, the big issuers rarely allow new funds to underprice their headline products for long.

But BlackRock, Vanguard and State Street all use the official ASX200 and ASX300 indexes, which drive up prices and require surrendering several basis points in AUM to the index provider.

But here too change could, in theory, come quite quickly. State Street, Vanguard and BlackRock’s US divisions have all strongarmed major index providers or dumped them on certain products, unhappy with their fees. There’s no obvious reason why something similar could not happen in Australia.

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