LGIM enters plain vanilla ETF space, but is it too late?

by , 12th November 2018

Entering the ETF market in 2018 is extremely difficult – but it’s most difficult of all in the plain vanilla space.

Which makes LGIM’s entry into the plain vanilla ETF market this week particularly interesting.

As part of an eleventh-hour foray into the heart of the ETF industry, LGIM is rolling out six new plain vanilla funds, which will track the equity markets of the UK, US, Europe, Japan, Asia-Pacific ex-Japan and global developed markets.

The funds will charge a cut-throat 5 – 10 basis points, which will price them in line with competitor funds from HSBC and Invesco, while being slightly more expensive than Lyxor’s core offering.

The funds will apply mild ESG screens, which exclude pure-play coal miners, civilian firearms manufacturers, and companies that repeatedly break the UN Global Compact.

The funds also claim to offer alternative rebalancing, aimed at dodging the index arbitrage that can come when popular indexes rebalance.

Analysis – is it too late?

The listings come at a late stage in the European ETF market, which is now almost 20 years old. While most of Europe’s big fund managers have been providing ETFs for more than a decade, LGIM has so far refused to take part.

The timing of the listings has left many wondering what strategy the company is pursuing.

“LGIM in ETFs are still pretty small at the moment and I think it’s not unfair to say that they’ve got a long way to go until they really take big market share from the likes of  Blackrock and Vanguard,” said David Stevenson, the CEO of ETF Stream.

“Over the next few years where I’d imagine they might hope to get to is to really target the middle pack of players such as UBS, HSBC and Invesco. If they invest heavily – and remember that LGIM is a big player in index funds – then getting into that next pack of second-tier players is absolutely achievable, after which they can then hone their strategy and attack the real big scale players.”

The listings constitute a change in direction for LGIM’s ETF branch.

Up until now, LGIM has focussed on thematic ETFs and alternative products like commodities. Yet that focus was mostly a legacy of the acquisition of Canvas, the ETF white labelling platform, from ETF Securities.

While the acquisition was smooth it hit some bumps early on. A number of staff exited following the sale. While the ETFs LGIM acquired began to bleed assets under new ownership.

The decline in AUM owed partly to negative market movements. But also to LGIM’s AUM mainstay – its robotics and automation ETF (ROBG) – coming under attack from Blackrock’s RBTX, in a targetted under-pricing offensive.

While the listing of core equity ETFs signals a change in direction, it also signals that LGIM is willing to make the investment and incur the cash burn required to put wings on plain vanilla ETFs.

“Bringing ETFs to market that charge as little as 5 basis points is great for investors, especially given LGIM’s powerful brand name,” said Bernie Thurston, the CEO of Ultumus.

“But – obviously – the new funds will have to be profitable. The plain vanilla space is ultra-competitive. If I were to guess – and I’m only guessing – I’d say breakeven for a conventional ETF structure would require the AUM for each of these products to be around £200M. Big cash burn at the beginning seems possible.”

Whether LGIM can hit the high breakeven AUM thresholds remains to be seen. It’s also unclear where LGIM intends to hunt for the assets it will require.

Contacted for comment by ETF Stream Howie Li, LGIM’s head of ETFs, said assets would come from traditional wealth managers and institutions.

The listings come at a time when equity markets globally are on the retreat. Money entering European ETFs in 2018 has been almost 50% lower than in 2017, Ultumus data indicates.

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Image: LGIM Kingswood, Source: Wikipedia.

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