By Chanchal Samadder, Head of Equity ETFs at Lyxor Asset Management
The growth in index investments over the last decade has been one of the biggest trends in investment management. There have been a number of factors behind this, but for many making the switch cost is the starting point.
Keeping a lid on cost is one of the most effective ways of maximising returns. But cutting cost doesn’t have to mean cutting corners. Quality is still important. Investors need to know their fund is robust and ready for the long haul. Experience and expertise are just as important here as they are for any other type of fund.
Why is reducing costs so important?
Quite simply, the more a fund manager takes out of an investor’s assets for themselves in the form of fees, the less goes back to the investor. And even while differences in fees might appear quite small, the longer an investor’s time horizon, the bigger their impact on returns because of the way investment returns compound over time.
We ran a simulation of the impact of costs over a 10yr period (end August 2008 to end August 2018). We took the Morningstar US Large-Mid Cap NR Index – one of the most complete indices of US equity, tracking over 800 companies. We then simulated the performance of three funds:
- Total Expense ratio 1.50% – typical for an active fund
- Total Expense ratio 0.30% – average for a mid-priced tracker
- Total Expense ratio 0.04% – Europe’s lowest cost equity ETF
The US market grew over 260% in this period, but the returns for investors were highly dependent on fees. $10,000 in the ultra low cost ETF would have returned $26,417. The mid-priced index tracker returned $420 less whereas the typical active funds would return $24,187 – losing over $2,200 due to fees. Of course this is an illustration, past performance is no guide to future returns. Many factors would impact the overall performance – but fund management charges are one element we can control.
Chart source: Lyxor ETF, for illustrative purposes. The figures relating to simulated past performances refer or relate to past periods and are not a reliable indicator of future results. This also applies to historical market data. The potential return may be reduced by the effect of commissions, fees, taxes or other charges borne by the investor.
The role of MiFID II in promoting cost-cutting
Recent regulatory developments mean there’s more scrutiny on cost now than ever before. The MiFID II rules, which came into play across Europe at the beginning of January, require much greater transparency when it comes to the fees investment managers charge and all the related costs of their products. This is shining a spotlight on the overall cost burdens investors are facing, and these new standards mean there’s nowhere to hide for asset managers. Such clarity around fees may well lead investors to flock towards lower-cost options such as ETFs.
Another reason is that up until MiFID II, in certain European countries fund managers could pay a rebate – or retrocession – to their funds’ distributors in return for selling their products. This is no longer possible, thus removing the incentive for investors to allocate to some of the more expensive options available to them. So in other words, all else being equal, investors are more likely to choose a less expensive option than they were before MiFID II. We’d argue the change in mindset is overdue – ETFs never paid retrocessions in the first place.
Choosing a partner
It’s not just about costs – index selection matters. At Lyxor, we take great care in choosing our index partners. High quality data, robust processes and rock solid governance are important factors when building market-cap weighted indices. We prefer to partner with big, trusted brands with a strong track record in indexing. Equally, if we can cut costs to help investors without compromising on quality, we’ll do exactly that.
Minimising costs with Lyxor’s new range of low-cost Core ETFs
In an environment in which every basis point matters, it’s a no-brainer to choose an ETF that only charges very low fees. And that’s exactly what Lyxor can provide. Lyxor launched a range of low-cost ETFs providing exposure to core asset classes – with TERs ranging from 0.04% to 0.12%. These are some of the lowest cost in Europe, and on average the fee is a third cheaper than the next best alternative.
Providing our clients with high-quality ETFs at such low cost might sound simple, but it isn’t: we’re only able to do so thanks to the experience we’ve gained over the past 17 years running ETFs and the scale we’ve achieved in the process. And you can be confident that while we’re cutting costs in our new range of core ETFs, we’re not cutting corners. Each fund meets exactly the same stringent quality standards covering their performance, risk control, liquidity and transparency that have long governed our wider range. They’re all replicated physically – the best option for large, liquid exposures like those in our core strategies – and we don’t use securities lending, so you know exactly what you’re investing in at any given time.
THIS COMMUNICATION IS FOR ELIGIBLE COUNTERPARTIES OR PROFESSIONAL CLIENTS ONLY
Source for fees and performance information: Lyxor ETF, Bloomberg – correct as at 20th September 2018.
This document is for the exclusive use of investors acting on their own account and categorized either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU.. These products comply with the UCITS Directive (2009/65/EC). Lyxor International Asset Management (LIAM) recommends that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to firstname.lastname@example.org. Lyxor International Asset Management (LIAM), société par actions simplifiée having its registered office at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorized and regulated by the Autorité des Marchés Financiers (AMF) under the UCITS Directive and the AIFM Directive (2011/31/EU). LIAM is represented in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658.