Blaming people for things is a crucial part of asset management.
Vast piles of money are being cared for, meaning the stakes are high. The stock and bond markets are made of people betting against each other resulting in winners and losers. And as asset management careers highly prized, it is handy to have someone to throw under the bus.
So pervasive is the blame game, academics have studied it and found a rump of industry professionals seem to exist simply to take the blame.
One study of pension funds concluded that pension bosses delegate money management to “reduce their responsibility for potentially poor performance of the plan’s assets”. While another concluded index fund uptake has been slow partly because “an index fund is a less credible target to blame for poor performance”.
Some have argued that blame-taking is the reason that rating agencies exist. When the Wall St Journaltook Morningstar to task for its fund ratings, a former Morningstar employee said: “it's a cover-your-ass type of service”. While many said the same for S&P, Moody’s and Fitch after their failures in the 2008 financial crisis.
Passive investing fee war: Who’s to blame?
The fee war in passive investing has scapegoats too. The first and most popular of which has been financial advisors.
When AdvisorShares launched its marijuana ETF (YOLO) at 1 basis point cheaper than incumbent ETFMG’s (MJ), Bloomberg’s ETF talking head Eric Balchunas said: “Launching 1 basis point cheaper than MJ is a bit absurd, but symbolic of the era we are in right now where expense ratio is one of the first things an advisor looks at.”
Table 1: Expense ratios incurred by index ETF investors have declined
Balchunas’s view meshes with a look at the data. The average ETF fee has been steadily declining for years, Investment Company Institute (ICI) data shows. This suggests money is going where fees are lowest. And if its advisors that are determining most flows, it is likely they are at least partly to blame.
But they can only be partly to blame. After all, for advisors to buy cheap ETFs, someone has to be selling them.
“Much of the reason average fees are falling is because ETF providers have instigated discounts. When ETFs get big enough, big providers mechanically cut fees,” said Bernie Thurston, CEO of Ultumus.
“Vanguard does this as a matter of principle. While, if you crack open the old iShares prospectuses, you see its written into the documents that as investors put more money in the funds, the fees come down.
“Meanwhile late entrants, with rare exceptions, know they have to under-price if they want to gain market share as vanilla index funds are inherently commoditised.”
Kraneshares overprices iShares with new emerging markets ETF
Is it the media?
Another potential culprit is the media. The fee war on index investing has proved a rich vein of copy for media outlets. (Including the present writer). Journalists and editors are something of a hive mind. Seeing their peers publish news articles covering certain topics, they often do the same.
“The media help to enhance the focus on the fee discussion,” said Deborah Fuhr, managing partner of research firm ETFGI.
“Journalists will focus on the fee war then people will read about it and then think it is an important criterion.
“In Europe, journalists who are new to covering ETFs will often start by asking about synthetic ETFs, which is really a story that’s been done and dusted. But journalists will see what others have written before then write about it again.”
Table 2: Total expense ratio of the top 20 ETF providers by assets
But how much influence the media has is hard to measure. Industry sources contacted for comment suspected the media has had some impact but stressed it was impossible to know how much.
Is it Vanguard and Jack Bogle?
The other obvious candidate for blame is Vanguard and its founder, the late Jack Bogle. For Bogle, asset managers charged greedy fees and needed to be given a spank.
Bogle founded Vanguard as a not-for-profit with the explicit mission of giving that spank. Given Vanguard’s central role in index investing – it seems likely that Bogle and Vanguard are partly to thank for the ever-declining fees.
“It takes something like a $250,000 a year to keep a fund running. That implies you need $50-$100 million under management: these are not magic numbers, they are relatively well known,” said Dave Nadig, managing director of ETF.com.
“If you are Vanguard, you have got a different structure and you can do whatever you want. But if you are BlackRock or State Street it is a question of how much pain you can take before it starts affecting the rest of your business.”
The final question in all this is what happens next.
Vanguard, Fidelity, Schwab and BlackRock now charge 0-4 basis points for core index funds. Meaning the industry has hit a point of diminishing returns. While cutting fees 70 basis points down to 35 makes an enormous difference, cutting from 4 down to 3 is irrelevant for most investors.
While irrelevant for investors, it is not irrelevant for ETF providers. Nadig adds: “I have concerns personally about the impact of the fee war. If fees keep coming down, while issuers continue to launch new products, deal with wage inflation and deal with new regulations, something has got to give.
“What is going to give will depend on the firm. In the case of BlackRock, they laid off 3% of their staff. And you have to assume some of those people were doing useful work that is now not getting done.”
ETF Insight is a new series brought to you by ETF Stream. Each week, we shine a light on the key issues from across the European ETF industry, analysing and interpreting the latest trends in the space. For last week’s insight, click here.