Thematic ETFs are proving to be somewhat of a gold mine for issuers in Europe as the pressure on fees is yet to reach this rapidly developing segment of the market.
Competition is fierce across all parts of the European ETF ecosystem with issuers constantly being forced to review their strategy line-up to see how it compares to others in the market.
Highlighting this competition, climate ETFs is the latest area of the market to feel the squeeze with Lyxor and Franklin Templetonboth recently slashing feesto single basis point levels despite the space being less than two years old.
Fees is one area that gets constant attention from both investors and the media so having the cheapest ETF available in a category can be a strategic way of attracting assets.
However, the pressure on fees is yet to feed into the thematic ETF space. According to data from Bloomberg Intelligence, the average fee of thematic ETFs launched in Europe this year has been 0.61%, the highest level in five years, as issuers look to cash in on the huge returns on offer and the unique nature of the market.
Thematic strategies are some of the most expensive ETFs on the European market. Highlighting this, The Medical Cannabis and Wellness UCITS ETF (CBDX) and the L&G ROBO Global Robotics and Automation UCITS ETF (ROBO) have total expense ratios (TERs) of 0.80%, higher than many active mutual funds.
Attempts have been made to disrupt the space. Last year, Lyxor introduced a temporary TER of 0.15% for its five-strong thematic ETF range, however, this reduction ends in September 2021 and the fees will likely jump to 0.45% after.
According to Bloomberg Intelligence data, there has been an average performance gap of 28 percentage points between the best and worst performers in each thematic ETF category in Europe over the past 12 months which naturally puts less emphasis on cost.
With investors less focused on cost due to the stark performance dispersion, issuers are able to justify the high fees they charge, especially the ones that construct a unique and successful strategy.
As Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said: “Given the performance dispersion and varying approaches to thematic investing, we expect the category to be less susceptible to cost pressure than more traditional benchmark-tracking funds.”
This focus on performance means it could be a while before thematic ETF fees are aggressively reduced, however, a quick glance over to the US shows Europe still has a lot of catching up to do from this perspective.