It is fair to say that there has never been a better time to be an individual investor. Investment choices, access to information, and the application of technology are at their greatest levels, which combined with a lower fee environment means that the investor has been benefited, sometimes at the expense of the investment provider.
Like other industries, such as the telecoms industry an increase in the number of providers and products has created a greater supply to meet a stagnant and unchanged demand from the individual investors. Basic economics tells us that where supply exceeds demand prices will fall, and this is exactly what we see happening across the whole industry. The rapid growth in the adoption of cheaper passive solutions has caused fund managers to respond by lowering their fees in turn.
The one unfortunate impact of all this is that you, the financial advisor, often finds your fee under pressure. At Magwitch, we feel very strongly that the advisor should earn their full fee which should be determined by the time and the expertise that they have had to apply to crafting the best investment portfolio for their clients. Just because the products themselves become cheaper does not mean that the knowledge and experience of the financial advisor diminishes in value. Assisting clients through navigating the volatility of the financial markets seems more essential than ever.
With the advisor fee being sacrosanct in our eyes the best way to reduce the Effective Annual Cost (EAC) for your clients would be to use investment solutions that have lower fees. The good news is that these fees are constantly getting lower and one could almost call it a “race to zero fees”.
Fees are critical in the ETF industry. If two ETF issuers track the same index and have the same tracking accuracy then fees become the big differentiator. As an example, we can look at the three largest ETFs in the world, who all track the S&P500. The oldest and biggest is the SPDR® S&P 500 ETF Trust (“SPY”) which was started in January 1993 and currently has $362bn in assets under management. The next biggest is the iShares Core S&P 500 ETF (“IVV”) which was started in May 2000 and currently has $276bn assets under management. The smallest of the three, which also happens to be the youngest, is Warren Buffett’s favourite Vanguard S&P 500 ETF (“VOO”) started in September 2010 and with $220bn assets under management. As the names all suggest they all track the same index, the S&P 500. What differentiates them is their fees.
State Street SPDR has kept the SPY net expense at 0.09% as represented by the blue line since their inception. Their competitors iShares and Vanguard have moved the expense ratios down over time for IVV and VOO respectively, often in response to each other’s fees. As one can see both the grey and the gold lines have settled at 0.03% or a third of the fee of the very large and very old SPY.
The impact over time has been that SPY’s share of the market has been almost halved as new investors opt for the cheaper offerings of their competitors. In the last ten years their market share has dropped from 77% to 42%.
Unless State Street SPDR responds and lowers the fees of their flagship SPY the trend would be expected to continue. All this fee pressure is definitely to the investor’s benefit.
Whilst we have just used three different ETFs as an example it is just a small portion of the Exchange Traded Product universe comprising close to 9 000 different ETFs and ETNs tracking a broad variety of indices. Such optionality does create a minefield of choosing the right passive products to be utilised in your portfolio. That is why it still remains important to have the experts in your corner.
Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers.