A brutal fee war led by Vanguard and BlackRock has gutted the profit margins on Australian core shares ETFs in recent years. But bond ETFs have remained unravished, with ETF providers holding fees on their biggest bond ETFs firm.
Speaking at the S&P Global conference, BlackRock and Vanguard said they would prefer to hold a truce on bond ETF fees for now. As they felt that Aussie bond ETFs were too small to make a fee war commercially viable.
“From Vanguard’s perspective, fee cuts are very much a scale thing,” Balaji Gopal, head of product strategy at Vanguard, said.
“As funds get bigger, it is easier to lower fees but at this stage we feel that the scale just is not there yet.”
Speaking alongside him, Christian Obrist, head of iShares Australia at BlackRock, said that bond ETFs were harder to run. This meant that a good chunk of bond ETF fees go into covering running costs and weren’t being trousered by ETF providers.
“Running a fixed income ETF is more complex from a portfolio management perspective. A lot of bonds do not trade frequently, therefore many fixed income ETFs are optimised, meaning only a subset of the index is actually invested into. Additionally, trading bonds can be more expensive than trading shares.
“Will fees eventually fall on bond ETFs? No doubt.”
But reluctance to cut fees may also be driven by ETF buyers themselves – the ones paying the fees in the first place.
According to Michael Jones, CEO of Caravel Concepts, a financial planning software company, advisors are happier to pay fees on bond ETFs. This is because it is impossible for them to trade bonds in the way trade bond ETFs.
“When advisors try to trade bonds directly, they often get charged big spreads by bond dealers as they aren’t making big enough trades. These spreads usually cost more than ETF fees. So even after accounting for the effects of fees, bond ETFs save advisors money.”
He added that retail investors – such as salaried professionals who use ETFs to grow their savings – typically have a hard time diversifying their bond portfolio because bonds come in large minimum investment amounts (typically each bond is $5,000 or more).
“Still to this day, a lot of US bond trading occurs over the phone between institutions. If you’re a retail investor trading tickets less than $10,000, ETFs provide excellent diversification and are the only good option available to you.”
|Total assets ($bn)||Bond ETF assets ($bn)||Percentage|
While bond ETFs have attracted large volumes of investor cash the past two years, they tend not to benefit from the compounding capital growth of the kind seen in the stock market. This can add to the difficulties of getting them to scale.