ETF Fees Fall as Scale and Product Design Shape Competition

Average ongoing charges for equity UCITS ETFs have fallen 49% since 2013, while fees for fixed-income ETFs have dropped 32%. Some mainstream equity ETFs now charge three basis points, increasing pressure on funds with similar market exposure.

Hector McNeil, co-founder and co-CEO of HANetf, described the idea that ETFs are simply cheap as “misleading.” An ETF is a product structure, he said, and its cost depends on the strategy it contains. A broad index tracker may cost three basis points, while a more complex strategy may cost 80 basis points.

Price competition is strongest when several funds offer nearly identical broad-market exposure. In that segment, providers have few obvious ways to distinguish their products. Larger funds can use scale to lower costs, attract inflows and reduce expenses further.

Vanguard has cut the ongoing charge on its FTSE All-World UCITS ETF to 0.14%. The firm attributed the reduction to strong investor demand and significant growth, which increased the fund’s scale.

Distribution is another source of competition. Large financial institutions may have established client relationships and distribution networks. They can also use white-label platforms to launch ETFs and retain more of the revenue within their businesses.

McNeil said mature markets can still support products with different structures or features. HANetf’s Royal Mint Responsibly Sourced Physical Gold ETC holds gold in Royal Mint vaults outside the banking system. Following Russia’s full-scale invasion of Ukraine, the product was able to exclude Russian-origin bars.

The ETC also uses recycled gold supplied through the Royal Mint’s precious-metals recycling operations. About 60% of its bars are certified as 100% recycled gold, according to McNeil. He said recycled gold can be 90% less carbon-intensive than mined gold. The product is not the cheapest gold ETC, but its assets have grown to about $1.5 billion.

“There can still be room to compete if you create genuine differentiation rather than simply trying to be one basis point cheaper,” McNeil said. “I don’t think the ETC would have grown to the size it was had we simply tried to just compete on price.”

Thematic and active ETFs provide other ways to differentiate a product. Thematic funds may compete through their launch timing, research and index construction. Active ETFs are distinguished by their managers, investment processes, teams and track records.

“Investors are paying for the manager, the investment process, the team, the track record and the firm’s expertise,” McNeil said. In funds with similar exposure, fees remain a direct point of competition. In products with different strategies or structures, distribution, methodology and product features can affect how providers compete.