Timo Pfeiffer, head of research and business development at Solactive, has said it is inevitable zero-fee ETFs will be launched in Europe in response to developments this year across the pond.
Speaking to ETF Stream, Pfeiffer (pictured) said the move should not come as a surprise to investors but rather is the next intuitive step.
Zero-fee ETFs have been one of the main talking points for the ETF industry this year after US-based platform Social Finance launched a range of zero-fee ETFs in February.
Salt Financial took this one step further in March when it filed the Salt Low truBeta US Market ETF (LSLT) in the US, which pays investors 0.05% to hold this. It should be noted these ETFs have management fees that have been waived by the respective asset managers.
The move to zero is yet to take place in Europe, however, Amundi recently launched a nine-strong range which charges 0.05% across the board while JP Morgan Asset Management matched Lyxor last week with Europe’s cheapest product at just 0.04%.
The race to the bottom has been met with criticism from some parts of the industry. Ben Johnson, director of passive funds research at Morningstar, said zero-fees would benefit fund firms and affiliated brokerages more than the end investor due to the free publicity these fund launches have gained.
Furthermore, Simon Klein, head of passive investments, EMEA and Asia at DWS, told ETF Stream the sole focus on fees was “misleading and dangerous” while Hector McNeil, co-founder and co-CEO of HANetf described the launches in the US as “gimmicks” and something investors should avoid.
Europe has already seen an ETF, which charges nothing. Some 10 years ago, Deutsche Asset Management launched a zero-fee ETF as part of its db x-tracker range, the DJ Euro Stoxx 50 ETF, however the fee was subsequently increased after the fund changed from synthetic to physical replication.
Despite the European ETF industry pushback on zero-fee products, Pfeiffer is confident of their success. At a recent conference in London, Pfeiffer noted he was “not the most liked guy in the room” following a presentation on the inevitability of zero-fee ETFs in Europe.
The reason why providers will want to launch a zero-fee ETF, he explained, is so they can offer other ETFs from their range such as thematic and smart-beta products to that same client base once they have captured their flows through the cheap market cap strategies.
Pfeiffer gave the example of Amazon, who offer products at a very cheap level which enables them to capture data on their customers and get them “hooked” on the platform.
“An investor who buys the core products at very little or no cost from an ETF provider is most likely to buy the more expensive stuff as well from the same provider.
“Thinking of Amazon, where the marketplace with its millions of participants generates invaluable market intelligence, a large ETF or index fund as such can provide similar value through its market insights, money flows and data points associated with it.”
Solactive’s head of research predicted the zero-fee product launch would come from one of the bigger players in the market due to the high barriers to entry.
“You need to have a certain size,” he said. “You can get to this scale if you are a large player so a launch like this will be from an ETF provider with deep pockets.”