Speaker 1: Welcome trains. I'm Joel Webber and I'm Eric bel Tunis.
Speaker 1: Ericter's been a like a mood in the wind of
Speaker 1: late where things have been getting cheap, cheap and cheaper.
Speaker 1: What's going on? Uh? We we have seen an outbreak
Speaker 1: in the e t f F F war, which by the way,
Speaker 1: has been going on ever since Vanguard was a company
Speaker 1: um and ever since the first t t F came
Speaker 1: out at sp Y came out at twenty basis points
Speaker 1: to sort of tie the Vanguard Index fund. This e
Speaker 1: t F FEW war is nothing new, but what was
Speaker 1: different was the intensity of this particular outbreak. And in fact,
Speaker 1: some people inside e t F the conference we covered
Speaker 1: a couple of months ago, they thought the e t
Speaker 1: f FE war was kind of over and rate is.
Speaker 1: I sort of heard people whispering like, ooh, it's done,
Speaker 1: it's over. Bam. Uh. There was a outbreak like I've
Speaker 1: never seen. We're talking about ten different issuers or shots fired,
Speaker 1: with about twenty different ETFs being affected. And it included
Speaker 1: everything everything from the big guys to the indies. It's
Speaker 1: all there. It was unbelievable and you know, garnered a
Speaker 1: lot of news. It also garnered a lot of reaction.
Speaker 1: You know, I think deep down inside you've got people
Speaker 1: in the fundustry are probably scared that this is really
Speaker 1: wild and scary for everybody's livelihood. Then you had some mockery.
Speaker 1: You know, what's nucks free, steak knives, um, you know
Speaker 1: that's always what you hear. One guy when the first
Speaker 1: shot was fired, which was a zero feetf one guy
Speaker 1: in my Twitter feed a couple of days later said
Speaker 1: how long till they pay you? And then and it
Speaker 1: turns out day later he was, you know, there there
Speaker 1: it was. So that's right, like it went not only
Speaker 1: to zero, but it went below zero. To the fact
Speaker 1: that one issue or basically started to pay you to
Speaker 1: actually hold an ETF. Yeah, this was I think a
Speaker 1: place we all thought we were going to go. But
Speaker 1: I think most people thought pay you would be a
Speaker 1: couple of years down the road. But the fact that
Speaker 1: it came so close on the heels of the zero,
Speaker 1: I think that's what. And then in between you had
Speaker 1: Vanguard in Black Rock and State Street all do their shots.
Speaker 1: Those are more like bombs because those are going to
Speaker 1: really affect some flows. But this was, I get again,
Speaker 1: the most intense two week period of the fee war
Speaker 1: that I've ever seen. Joining us on this episode of
Speaker 1: Trillions is Rachel Evans to help us walk through this
Speaker 1: timeline of the great fee War, this time on Trillians
Speaker 1: the Race for Zero. Rachel, always a pleasure to have you.
Speaker 1: Thanks having me. When you saw this happen and it
Speaker 1: kind of culminated in in late February, what was your
Speaker 1: take on it? Yeah, so I mean as that as
Speaker 1: that kind of said earlier, like we've been seeing this
Speaker 1: fee war developing over the last few years. In many respects,
Speaker 1: this is really nothing new. This kind of cut and
Speaker 1: count a cup, particularly from the big three Black Rock,
Speaker 1: Vanguard and State Street, has really been taking place for
Speaker 1: a long long time. However, what struck me is kind
Speaker 1: of new this time is that really that the diversity
Speaker 1: of players that kind of like suddenly wanted to have
Speaker 1: a crack at lowering price in order to either get
Speaker 1: attention and or lure assets. And it really seems that
Speaker 1: this has become something that is not just for a
Speaker 1: select few large issuers, but something that really everybody wants
Speaker 1: to have a go out. And I think it really
Speaker 1: speaks to exactly how important cost has become within the
Speaker 1: e t F market. You know, whether you're a retail
Speaker 1: investor putting in a few thousand here or there, or
Speaker 1: whether you're an advisor with a millions or billions to
Speaker 1: allocate cost has become something that issuers can can't afford
Speaker 1: to ignore. They have to have something that they can
Speaker 1: show to to those investors that says, hey, you know,
Speaker 1: if you get into this fund, yes the strategy is good,
Speaker 1: Yes we have a good brand. But actually it's also
Speaker 1: not going to cost you much. But isn't this I mean,
Speaker 1: this is a huge business problem. When it's great for
Speaker 1: a consumer like great, everything's free or almost free, what
Speaker 1: does it mean for asset managers? That is the big challenge, right,
Speaker 1: I mean, if you are charging nothing for your funds,
Speaker 1: where do you make a profit? Now? For for some companies, Banker,
Speaker 1: for example, has an interesting business model in which it
Speaker 1: isn't really working for shareholders. It's working very much for
Speaker 1: kind of I guess, the shareholders in its ETFs. Whereas
Speaker 1: you know, for other companies that are publicly listed, you
Speaker 1: know they have shareholders that they are accountable to and
Speaker 1: they do need to generate a profit. So the idea
Speaker 1: is that if you cut two very very low. You
Speaker 1: then either kind of managed to make it up by
Speaker 1: getting lots of assets into those funds and a very
Speaker 1: very low one basis point on a billion dollars, for example,
Speaker 1: it's better than fifty basis points on no billion dollars.
Speaker 1: So in that respect, you can make it up there,
Speaker 1: or you try and potentially upsell by having other products
Speaker 1: that you know, do charge more that you can kind
Speaker 1: of move clients into once they brought those very cheap products.
Speaker 1: There are also a few ways in which you can
Speaker 1: try and make a no cost funds sort of pay
Speaker 1: for itself. They're a little bit more technical, but tend
Speaker 1: to involve, you know, securities lending, lending out the securities
Speaker 1: from within the fund for a fee, and then using
Speaker 1: that to offset the lost revenue from charging nothing. Let
Speaker 1: me jump in here, because you know, the invisible hand
Speaker 1: behind all this is advisors. They switched to a model
Speaker 1: where they get paid as a percentage of the client's
Speaker 1: assets as opposed to getting a commission from the mutual fund.
Speaker 1: So what that did is it kind of left mutual
Speaker 1: funds out and out in the cold, because now that
Speaker 1: you're getting a percentage of your client's assets. Of course,
Speaker 1: you want cheap stuff, right, But advisors may be creating
Speaker 1: a monster that when may come back and haunt them
Speaker 1: because if they're so cost obsessed to the point where
Speaker 1: they're going to drive the issuer's fees down to nothing,
Speaker 1: these issuers who can't sell a fund over ten basis
Speaker 1: points may start looking at their one percent fees and
Speaker 1: be like, hm, that looks like a good business to
Speaker 1: get into. And so advisors, for the most part haven't
Speaker 1: felt anything close to what asset managers are going through
Speaker 1: with their fees. So you may find asset managers start
Speaker 1: to get closer and closer to the end customer and
Speaker 1: become advisors themselves. You've already seen it with Vanguard and
Speaker 1: Schwab black Rocks becoming like a technology provider to advisors
Speaker 1: to try to make money from them in different ways.
Speaker 1: And this is also you know when Fidelity did their
Speaker 1: zero about a year ago. Since then, the index of
Speaker 1: asset managers is down, and this is when the S
Speaker 1: and P is up six percent, so that's under performance
Speaker 1: of stocks of asset managers. So you can see that
Speaker 1: Wall Street is really onto this, even though the revenues
Speaker 1: haven't been hurt that badly. Because of the bull market's
Speaker 1: been nice for their assets and revenue. This is sort
Speaker 1: of them looking forward and saying these companies are in trouble. Yeah,
Speaker 1: that's gonna be really interesting, you know, when we do
Speaker 1: get a bear market, given that things are already at
Speaker 1: this point where so many fund issues have had to
Speaker 1: lower their fees towards zero, and that has been very
Speaker 1: much done on the basis that assets will continue coming
Speaker 1: into these funds and these funds will continue growing to
Speaker 1: allow them to make a profit. If we start to
Speaker 1: see a bear market, yes, et F may well become
Speaker 1: kind of a place where people can hide out and
Speaker 1: try and kind of ride out the storm. But it
Speaker 1: does make it much harder for those asset managers to
Speaker 1: keep blowering costs and to make a profit. It could
Speaker 1: become quite nasty when we do see see that bad market. Yeah.
Speaker 1: I mean most people are calling for an intense period
Speaker 1: of consolidation, and I think a bear market may trigger that.
Speaker 1: In my opinion, you know, I think these brave souls
Speaker 1: in the E t F Terror Dome as I call it,
Speaker 1: that are fighting vanguard and you know, losing limbs left
Speaker 1: and right. I think they will be rewarded In the
Speaker 1: long run, I think these companies, because they have organic growth,
Speaker 1: they have things people want, which is cheap ETFs um.
Speaker 1: On the other side of a bear market, they may
Speaker 1: find themselves the buyer of some of these large asset
Speaker 1: managers that have were brand names for years. So companies
Speaker 1: like Black Rock, State Street Invest, Go Schwab. I think
Speaker 1: their names could be around in ten or twenty years.
Speaker 1: As much as the pain they're feeling now, they may
Speaker 1: be rewarded down the road in terms of growing through
Speaker 1: acquisition and getting scale that way. Okay, I want to
Speaker 1: walk through this leaderst fee war and and this two
Speaker 1: week period that we've been talking about. What was the
Speaker 1: first shot across the bow? So so the first shot
Speaker 1: across the bow was really so far. This is the
Speaker 1: the online lender you've probably received through the mail various
Speaker 1: kind of offers to refinance your student debt. Well, these
Speaker 1: guys now have their own kind of like asset management
Speaker 1: type business where they're trying to encourage people to to
Speaker 1: let them sort of invest their money on their behalf
Speaker 1: as well as be financing their loans. So one of
Speaker 1: the things that they're doing as part of that is
Speaker 1: that they are launching these two e t fs that
Speaker 1: are going to be zero fee or at least zero
Speaker 1: fee for a certain period in time. The way they're
Speaker 1: doing this is rather than price the product at zero
Speaker 1: basis points for for the life of the products, they're
Speaker 1: actually doing a fee waiver, so the management fee will
Speaker 1: kick in potentially in a year's time. And so this
Speaker 1: was that the kind of first real shot across the bow.
Speaker 1: This came out in late February, and it really shows
Speaker 1: I think kind of in terms of you know, these
Speaker 1: different theater as of war, if you will, of kind
Speaker 1: of like how the this price always kind of being four.
Speaker 1: This is really that this is a new entrance that
Speaker 1: kind of needs come into the market. They need to
Speaker 1: make a splash, and this is a way to kind
Speaker 1: of like get headlines and get people interested in their products,
Speaker 1: you know, when they don't necessarily have a background in
Speaker 1: asset management, especially when it has a younger audience. Exactly
Speaker 1: absolutely a couple of things on so far. I do
Speaker 1: think this one isn't going to become big business. I
Speaker 1: think they'll probably service their own clients with this product
Speaker 1: or these products that are zero I don't know how
Speaker 1: many outside investors they'll get a couple of reasons. One,
Speaker 1: they're not that well known. You know, they're not a
Speaker 1: brand name like black Rock or Vanguard or JP morgan UM.
Speaker 1: The second thing is that the zero fee funds they're
Speaker 1: launching aren't pure beta or you know, it's not like
Speaker 1: the SNP or the total market. They're actually a sort
Speaker 1: of a proprietary index that has a growth tilt. I
Speaker 1: think they think the millennial clients are more aggressive, and
Speaker 1: I get that. So you know, unless you're pure beta,
Speaker 1: you're not going to get mass money. I mean you're
Speaker 1: you're obviously looking for a smaller audience, uh that way.
Speaker 1: So I don't know if that'll be big, but it's
Speaker 1: certainly got the headlines. UM. It's something that I think
Speaker 1: will have ripple effects. And but beyond that, it is
Speaker 1: interesting that it shows that outside companies that have nothing
Speaker 1: to do with the t F s UM now have
Speaker 1: a quick way to launch a free t F to
Speaker 1: serve their existing clients, because there's been some calls that
Speaker 1: tech companies may get into this business, and so far
Speaker 1: went through a UM somebody else's exemptive relief. So it's
Speaker 1: almost like they took this fast track to get it done,
Speaker 1: and you may find um E t f s being
Speaker 1: issued to service small groups of clients, and that way
Speaker 1: they don't have to pay Vanguard to black Rock. I
Speaker 1: actually think that I kind of disagree with you. I think,
Speaker 1: actually this is a really interesting strategy because you have
Speaker 1: a built in audience and you've just got them basically
Speaker 1: out of their debt, and now it's like, hey, as
Speaker 1: long as we get you out of debt, do you
Speaker 1: wanna help make money? Yeah? But the question is, again,
Speaker 1: if you're looking at the big, gigantic sort of ocean
Speaker 1: of assets, um is an advisor in Texas gonna put
Speaker 1: their clients money in so Far and have to explain
Speaker 1: what that is rather than say black Rock or shall
Speaker 1: you know what I mean? It's maybe if so Far
Speaker 1: grows and grows. But I just think this is a
Speaker 1: product for their own audience. That's it. I actually think
Speaker 1: that's advantageous. But then the next day of February what happened.
Speaker 1: So we we've already just heard about the new entrance.
Speaker 1: This was really a case of the old established guard
Speaker 1: kind of like coming out with with their latest round
Speaker 1: of feed cuts. This was Vanguard. Vanguard came out and
Speaker 1: cut by one or two basis points fees on about
Speaker 1: ten ETFs. Of course, they didn't finish off that week necessarily,
Speaker 1: and sitting on that, they actually came out and then
Speaker 1: cut a few basis points off another three funds, three
Speaker 1: big funds, including their SMP five hundred funds that became
Speaker 1: the lowest cost SMP five hundred focused e t F
Speaker 1: with that fee cut. So that was kind of a
Speaker 1: really interesting example I guess of kind of how I
Speaker 1: sort of think of, like, you know, the US versus
Speaker 1: the Soviet Union in this kind of price wall. I mean,
Speaker 1: this is kind of like where the real sort of
Speaker 1: arms races going on between Vanguard and Black Black and Vanguard.
Speaker 1: The two tend to kind of like they won't tell
Speaker 1: you necessarily that they're watching that their their rivals that closely,
Speaker 1: but they're very aware exactly. Yeah, there are some interesting
Speaker 1: timings that on these things. Um So, Vanguard very much
Speaker 1: came out and kind of like put down a sort
Speaker 1: of market and said, you know, here, here we have
Speaker 1: the cheapest kind of S and P fivet F now
Speaker 1: out there. Um So that was kind of like an
Speaker 1: example I guess of of perhaps more of the type
Speaker 1: of feewall that we've been coming to expect rather than
Speaker 1: the new guys. And that's interesting because Vanguard hasn't been
Speaker 1: the cheapest in the S and P five hundred, right,
Speaker 1: They've they've struggled to kind of always be lower than
Speaker 1: anybody else there. Yes, I mean it's kind of an
Speaker 1: interesting one because, like you know, you have all these
Speaker 1: broad stock market funds and Vanguard has always kind of
Speaker 1: been towards the top there. But it's very much been
Speaker 1: kind of this question of people changing positions every few months.
Speaker 1: You know, you've got sort of Black Rock and Vanguard
Speaker 1: kind of vuying like one's one's up on the other
Speaker 1: one month, one's up on the other the next month.
Speaker 1: You've got State Street making a push to get into
Speaker 1: that space, not so much with their and P five
Speaker 1: hundred fund spy that's actually ready to be expensive, but
Speaker 1: with broad stock market funds. They have also been in
Speaker 1: that space. And Schwab, which is a new entrant into
Speaker 1: the space, has been incredibly aggressive at launching and cutting
Speaker 1: fees to actually be in that space and very much
Speaker 1: alongside Black rocome Banguard at the top there. Yeah, this
Speaker 1: is kN Congrese Godzilla, right, So this is and this
Speaker 1: will move billions if not hundreds of billions of dollars.
Speaker 1: This is big boy stuff here. The Vanguard case is
Speaker 1: interesting because and what Rachel just described we referred to
Speaker 1: as the core wars, because these are products that would
Speaker 1: make the core of your portfolio, which is where most
Speaker 1: of the money in America is. Right. So when they
Speaker 1: cut one bib, when i VV came out and went
Speaker 1: one bit lower than VOO back in, i VV immediately
Speaker 1: doubled its rate of flows and became the biggest flow getter,
Speaker 1: and since then and got separation from VO from twenty
Speaker 1: billion to sixty billion. Now VO comes out cuts one
Speaker 1: bit lower than i VV two weeks ago, and since
Speaker 1: then it's had its biggest weekend flows. Ever. We can't
Speaker 1: prove that's related, but I wouldn't be surprised if you
Speaker 1: see VOO get a nice bump out of this, because
Speaker 1: we've seen the power of of one basis points one
Speaker 1: basis point in this case, especially in the SMP five hundred.
Speaker 1: But overall, the core wars are a rough, brutal place
Speaker 1: to be. But if you just take the four corey
Speaker 1: tfs from black Rock and you compare them to the
Speaker 1: four corey ETFs of Vanguard, those eight e t f
Speaker 1: s alone have taken in the inflows in the past
Speaker 1: three years, even though they only made up eighteen percent
Speaker 1: ish of the assets at the beginning of that time.
Speaker 1: In other words, that is where a lot of the
Speaker 1: money is flowing. UM again, that this is a real
Speaker 1: assets that that you know, you see at the top
Speaker 1: of the leaderboard year in and year out. I have said,
Speaker 1: I really liked a stat that Blamebag Intelligence had at
Speaker 1: the end of last year, which was that I think
Speaker 1: nine percent of flows into index funds when you look
Speaker 1: at ets and mutual funds have gone into products charging
Speaker 1: less than twenty basis points. I mean, that's crazy. I
Speaker 1: mean that show to you quite like quiet how imports
Speaker 1: into it is to have a cheap product. Okay, the
Speaker 1: next turn of this grew happened on March first, Eric.
Speaker 1: What happened then March first was an interesting one UM
Speaker 1: State Street. Quietly, this was in the shadow of Vanguard.
Speaker 1: I thought said they were gonna UM convert C junks,
Speaker 1: J and K, which was a crossover sort of double
Speaker 1: B bond et F they had that wasn't getting much
Speaker 1: traction because of the products had sort of done better.
Speaker 1: They're converting it to a broad high yield product. But
Speaker 1: by the way, they're going to slash the fee to
Speaker 1: fifteen basis points. This was quiet, but in any other
Speaker 1: you know, time period, you're essentially seeing State Street a
Speaker 1: major issue or come out with the cheapest junk bond
Speaker 1: etf on the market by a good measure too. And
Speaker 1: we've seen that. Deutsche Bank, I think two years ago
Speaker 1: came out with h y LB, which was at the
Speaker 1: time undercut everybody and fees in the junk bond market
Speaker 1: because it was twenty basis points. So here comes State Street.
Speaker 1: Now as of April one is going to have a
Speaker 1: broad high yield TF for fifteen um. I can't imagine
Speaker 1: this doesn't do well. It's a big issuer. And we've
Speaker 1: seen the power of cheap in the junk bond space.
Speaker 1: Most people who are traders are going to use H
Speaker 1: y G and J and K. They just want that liquidity.
Speaker 1: But there is a group of longer term investors who
Speaker 1: are really going to respond to those uh that those
Speaker 1: low fees, and I think H C, J and K.
Speaker 1: Let's look out for New Year to probably have a
Speaker 1: billion dollars. I'm really curious though, to see how Deutsche
Speaker 1: Bank and black Rock potentially react to this, because there
Speaker 1: was a really entertaining, from my perspective, a little spat
Speaker 1: that kind of like flared up in this fee wall.
Speaker 1: I think it was last year, may have been the
Speaker 1: year before. Time is flying past, but basically what once
Speaker 1: h y LB came out and did kind of undercut
Speaker 1: the rest of the market. Black Rock came out with
Speaker 1: this new broad high yield fund. I think the tackle
Speaker 1: was U s h Y. Does that sound right, Eric, Yes,
Speaker 1: that's the that's the one that's like double the securities
Speaker 1: of h YG but it's still broad and sort of
Speaker 1: market exactly. But anyway, they came out with that, so
Speaker 1: that was that was cheaper, and then Deutsche came out
Speaker 1: and cut the fee on h y l B two
Speaker 1: it's to kind of undercut U s h Y. So
Speaker 1: I'm curious to see kind of like whether this fifteen
Speaker 1: basis point sort of shot across the bow actually prompts
Speaker 1: black Rock or Deutsche has come out and try and
Speaker 1: be the cheapest again, or whether they're prepared to, you know,
Speaker 1: take the fact that they've managed to get decent number
Speaker 1: of assets into h y l B and kind of
Speaker 1: sit on that and assume that that money will keep
Speaker 1: coming in now that they've reached that kind of landmark.
Speaker 1: And what's interesting is what Spiders really doing here, and
Speaker 1: they've done it over and over, is in a way
Speaker 1: mirror what black Rock did, which was pretty genius. Back
Speaker 1: in the day. Black Girl was getting its lunch eaten
Speaker 1: by Vanguard, so it said, hey, let's instead of we
Speaker 1: know we've got these liquid products that traders want and
Speaker 1: they don't care what the fee is, Let's keep those
Speaker 1: there and we'll come out with a core series. So
Speaker 1: they've come up with similar products that do similar things,
Speaker 1: but they're way cheaper. Their priced at Van Guardian level.
Speaker 1: So Spider is keeping J and K, which I think
Speaker 1: is forty BIPs and now they've got their sort of
Speaker 1: core series version with C junk and that's what black
Speaker 1: Rock has with h Y G and U S h Y.
Speaker 1: So a lot of these issues are started getting with
Speaker 1: the program of let's keep our liquid ones at the
Speaker 1: higher fee because traders don't care what it costs, and
Speaker 1: then we'll have these lower ones for these costs obsessed advisors.
Speaker 1: And what's this done. I mean, look, we're a couple
Speaker 1: shots into this. This full on cost cutting war here.
Speaker 1: What's the mood like by this point that you guys
Speaker 1: can kind of discern. I think people are starting to
Speaker 1: sort of quake a little bit in their boots. And
Speaker 1: when you start to see kind of like this happening
Speaker 1: across such a variety of different products, it makes you
Speaker 1: start wondering, like, you know, you start looking over your shoulder,
Speaker 1: who's next, Who's going to come up, come out, Who's
Speaker 1: going to undercut which products? So I think there's a
Speaker 1: lot of people, you know, on the sidelines kind of
Speaker 1: talking to their their fund boards, talking to others in
Speaker 1: the market, and trying to get a sense of like
Speaker 1: where the right prices for their products at the moment.
Speaker 1: I mean, no, no an issue is ever going to
Speaker 1: tell you before that they come out and cut that
Speaker 1: they're thinking about cutting it. It doesn't have it a
Speaker 1: good ring to it. But I think there's a lot
Speaker 1: of kind of conversations going on behind the scenes as
Speaker 1: to whether this kind of like resets the dial for
Speaker 1: what you can actually ask for these types of products,
Speaker 1: and and are people seeing any glimpses of success, because
Speaker 1: success would look like what inflow right, Well, it's it's
Speaker 1: Eric's point. I mean like Voo which did cut. That's
Speaker 1: the the SMP five D product that Vanguard runs, and
Speaker 1: that had a four billion dollar plus week, and last
Speaker 1: week was a bit of an odd week for for flows.
Speaker 1: It's what we call quadruple witching, which has a very
Speaker 1: nice ring to it, but basically just means that there's
Speaker 1: an awful lot of futures contracts and an options contracts
Speaker 1: expiring around the same time. It can fuel some flows
Speaker 1: and some index rebalance things that happened then too, So
Speaker 1: there's a little hard to kind of like disaggregate the
Speaker 1: flows from from all of that kind of activity. However,
Speaker 1: the fact that this was a record week for for
Speaker 1: the fund and it came, you know, just a couple
Speaker 1: of weeks after that FEKA does certainly suggest that they
Speaker 1: are seeing some early success there. Okay, we're in early March,
Speaker 1: March fifth, March seventh. What happens, So this is kind
Speaker 1: of like where things start to get a bit thematic.
Speaker 1: So we're kind of talking so BEFO, I've been talking
Speaker 1: about kind of these broad exposures, so broad equity exposure
Speaker 1: or broad kind of like debt high yield exposure. This
Speaker 1: is where the fee will starts to kind of like
Speaker 1: really sort of drill down into some of these more nuanced,
Speaker 1: niche kind of products. So Defiance, which is a relatively
Speaker 1: new issue, it comes out with a five G focused ETF,
Speaker 1: so this is looking kind of the next generation of
Speaker 1: smartphones and of communications. They're charging thirty basis points for that,
Speaker 1: which in the thematic spaces is pretty down low. The
Speaker 1: theme space is interesting. Thirty BIPs, you know, that's like
Speaker 1: coming out with a broad based ETF at like four.
Speaker 1: I mean, that is extremely low. The average thematic et
Speaker 1: F fee is sixty two basis points. But even when
Speaker 1: you asset weighted, typically you get to a number half that.
Speaker 1: But the asset weighted average is sixty. So a thematic
Speaker 1: ETF doesn't really need to go that hardcore. The problem
Speaker 1: is once of THETF hits and if you charge like
Speaker 1: say sixties seventy, black Rock, Goldman and these other big
Speaker 1: issues are going to smell some money, They're gonna come
Speaker 1: in and undercut you. So I think this is Defiance
Speaker 1: his way of spraying black rock repellent on the e
Speaker 1: t F. And just I've seen this before a lot
Speaker 1: of issues just look into the future and they'll go
Speaker 1: you know, what the hell with it, Let's just go
Speaker 1: to where we're never'll be gonna go anyway, and this
Speaker 1: way we can save ourselves all the trouble. So to me,
Speaker 1: that is a just as interesting a shot in the
Speaker 1: few war as any other ones, even though thirty doesn't
Speaker 1: seem nearly as low as the other ones. Relatively speaking,
Speaker 1: that's low, and especially low for such a specific thematic
Speaker 1: e t F. It's an interesting one as well, because,
Speaker 1: I mean you do have very much that kind of
Speaker 1: like you know, breathing on the back of your neck
Speaker 1: from Black Rock and State Street and Goldman. I mean,
Speaker 1: they've all launched thematic products over the last year. So
Speaker 1: if you are a niche issue where that focuses on thematic,
Speaker 1: you are very aware of those kind of goliaths in
Speaker 1: the room that kind of like a looking to step
Speaker 1: once your turf. At the same time, you're one of
Speaker 1: the reasons that they're looking to step onto that turf
Speaker 1: is that they are able to charge higher fees for
Speaker 1: those products. It's it's something that helps offset from a
Speaker 1: revenue perspective, the fact that they're cutting costs elsewhere. So
Speaker 1: there's this interesting dynamic whereby on the one hand, you
Speaker 1: know you need to kind of like go low because
Speaker 1: it does act as black clock repellent is. To the
Speaker 1: other hand, black bocks coming into that space because they
Speaker 1: do want to be able to charge your fee. And
Speaker 1: when you look at the ETFs, you know that they
Speaker 1: are cheap, and this one is a good example. It
Speaker 1: charges thirty basis points. But we have this new score
Speaker 1: we're running uh in BI, which we call the thematic
Speaker 1: capture score, which looks at how much of the stocks
Speaker 1: actually get the revenue from the theme. And this one's
Speaker 1: very low, thirty six. We've got other ones that are nine,
Speaker 1: so this is on the low side. So in a way, again,
Speaker 1: this is a good reason to look beyond the fee
Speaker 1: sometimes because if you're looking for five G direct direct revenue,
Speaker 1: you're only getting a slice of it here. And the
Speaker 1: other thing is it also shows that what I used
Speaker 1: to call vf z s Vanguard free zones where you
Speaker 1: could make a little money and you know, buy some
Speaker 1: food and stuff, those are gone, um Vanguard free zones.
Speaker 1: Other people are now taking a page from Vanguard's book
Speaker 1: and coming in low. Goldman did it in smart Bet
Speaker 1: a couple of years ago with GSLC, and so the
Speaker 1: vanguard free zone is almost the thing in the past.
Speaker 1: The only place left where none of this is really
Speaker 1: happening is in these high octane leverage gts which charged
Speaker 1: No one's really messed with those. Outside of that, I mean,
Speaker 1: it's pretty much fee war on. So maybe there is
Speaker 1: black Rock repellent spray. But on the seventh of March,
Speaker 1: black Rock also launched a cheap e t F specifically
Speaker 1: on Japan. Yeah, necessary Japan e t F. They've they've
Speaker 1: had e w J for a long long time. It's
Speaker 1: pretty expensive. It charges forty seven basis points as expense
Speaker 1: ratio for that. They came out with a couple of
Speaker 1: Japan products that charge fifteen basis points, so they are
Speaker 1: undercutting themselves. Now, these products are slightly different um one
Speaker 1: of them is equal weighted, for example, so it's taking
Speaker 1: a more kind of smart beta appro to to the
Speaker 1: country specific space. But it's interesting that in this war
Speaker 1: they are even prepared to undercut themselves if it means
Speaker 1: trying to kind of get some market share. Interesting to me.
Speaker 1: They are not, however, the cheapest funds in the Japan space.
Speaker 1: There are other products that are out there that are
Speaker 1: nine basis points, which does mean that potentially those are
Speaker 1: the ones that are kind of like vying for that
Speaker 1: that you know, very very free conscious investor. But it
Speaker 1: is interesting that they are trying to I guess, similar
Speaker 1: to what they did with these core products and a
Speaker 1: while back, they are trying to create a product that
Speaker 1: is cheaper and potentially appeals to the free conscious investor,
Speaker 1: whilst keeping the products that has a lot of assets
Speaker 1: already and can afford to charge forty seven pips. This
Speaker 1: was also I don't know if a response to JP
Speaker 1: Morgan JP. Morgan had come out with a cheap Japan
Speaker 1: e t F b b JP at nineteen basis points,
Speaker 1: undercutting e w J, and a lot of its own
Speaker 1: advisors moved from e w J to b b JP,
Speaker 1: which brought up concerns of conflict of interest, pushing that
Speaker 1: aside for a seconds, a whole other conversation. Um, this
Speaker 1: is kind of a shot fired back, although it's equal weighted,
Speaker 1: so you are going to get a little more risk.
Speaker 1: It's not maybe for the same audience, but I guess
Speaker 1: black Rock can now roll into a meeting and say, yeah,
Speaker 1: we have cheap Japan too. They weren't the only ones
Speaker 1: to do something. On March seventh, DWS did something in
Speaker 1: the E s G space. So this is the asset
Speaker 1: management arm of Deutsche Um that they rebranded, but it's
Speaker 1: always good to remember as Deutsche Um. So they launched
Speaker 1: an E s G fund U s s G that
Speaker 1: came in at ten basis points, undercutting all the other
Speaker 1: E s G funds out there. And they did this
Speaker 1: because they had the help of a finished pension funds.
Speaker 1: So they already have eight hundred million of assets under management,
Speaker 1: which is very very good for for a new fund
Speaker 1: that often kind of daudals that around three million UM.
Speaker 1: But basically are they are charging the least um for
Speaker 1: an E s G E T F in in the
Speaker 1: U S And it really shows, I think of how
Speaker 1: you're not just in the thematic space, not just in
Speaker 1: the in the country space, but even within areas like
Speaker 1: environmental social governance social responsibility fee is important. That potentially
Speaker 1: is an area where you could see invest is more
Speaker 1: willing to pay up if they actually think that a
Speaker 1: fund represents their values or think that a fund is
Speaker 1: kind of you know, sort of doing the right thing
Speaker 1: in terms of how it how it measures those criteria,
Speaker 1: but this is still an area where we are seeing
Speaker 1: that kind of fear reduction come through, and I think
Speaker 1: it just shows you how extensive this people already is.
Speaker 1: And also E s G had been the one space
Speaker 1: where we weren't sure back in the day whether people
Speaker 1: just didn't like E s G in reality or they
Speaker 1: just wanted it cheap. Now I think we're starting to
Speaker 1: see they do want E s G. They just waiting
Speaker 1: for cheap products. Because Vanguard came up with a product
Speaker 1: for twelve basis points in the s G space that's
Speaker 1: already up to million. That's that's not bad for less
Speaker 1: than a year old um, and then you have US SG.
Speaker 1: So if you look at it, most of the flows
Speaker 1: now we're going to E s G products less than
Speaker 1: twenty bits, which sticks to that whole of the money
Speaker 1: likes to go into that space. So in a way,
Speaker 1: it's probably a good sign for E s G people,
Speaker 1: because I think there was some I mean, I was
Speaker 1: definitely thinking that s G was maybe more of a
Speaker 1: myth because had all this great suppress, all these surveys,
Speaker 1: and the assets weren't coming. But now we're seeing that
Speaker 1: maybe they just wanted it a little cheaper because we
Speaker 1: are seeing decent flows now into them if they're low cost.
Speaker 1: So this part of this two week moment was all
Speaker 1: about sort of thematic E t s and then things
Speaker 1: got crazy. What happened the next week because Swab, JP Morrigan,
Speaker 1: and then the harbinger of of crazy craziness the negative
Speaker 1: fee e t F what happened with sub and JP Morgan.
Speaker 1: So this week really encapsulated pretty much everything that we've
Speaker 1: kind of been seeing. So JP Morgan, it's a relatively
Speaker 1: new entrant into the e t F space. It comes
Speaker 1: out with a two basis point a fee on its products.
Speaker 1: Some have speculated that it could have been zero. We
Speaker 1: were slightly disappointed in that, but two basis points still
Speaker 1: the cheapest e t F out in the market if
Speaker 1: you exclude those that are offering fee waivers. Interesting because
Speaker 1: JP Morgan, as his new entrant, has actually managed to
Speaker 1: double its assets over the last year it so this
Speaker 1: is something that has definitely worked for them. They have
Speaker 1: been able to undercut their competitors and game market share.
Speaker 1: But that wasn't gonna stand in the headlines for long.
Speaker 1: We had Schwab coming out and reducing small cap MidCap
Speaker 1: and dividend e t F by one basis point at
Speaker 1: piece shows you exactly how much these little margins go.
Speaker 1: And then we had Self Financial, a name that I
Speaker 1: don't think many people in the industry had come across before.
Speaker 1: They only had one et F out there, coming out
Speaker 1: with something totally changed the game, offering fifty cents for
Speaker 1: every one thousand invested for the first year if you
Speaker 1: buy their e t F and so just quick clime
Speaker 1: at Schwab always response. We were waiting for them, and
Speaker 1: just on que they responded, they're famous for that and
Speaker 1: they're all cheap. So not a shocker there, JP Morgan
Speaker 1: a little bit of a shocker. I thought that would
Speaker 1: be zero. It was two. I don't know if we'll
Speaker 1: move the needle that much because if you get if
Speaker 1: you can get that kind of exposure total market for
Speaker 1: three um and its liquid, that's a tough cell. But
Speaker 1: we'll see. And then the negative fee one got a
Speaker 1: lot of eye rolling, lot of skepticism. I think it
Speaker 1: was this really taps into the plight of the small issuer.
Speaker 1: They're what they're really doing is saying, and it's not
Speaker 1: a bad product, it's a low ball product. That charges
Speaker 1: twenty nine basis points. That's fine, that's that's reasonable. They're
Speaker 1: just waiving it and giving you five bits to help
Speaker 1: bring you in because not many people want to be
Speaker 1: the first investor in a new e t F. So
Speaker 1: we'll pay you for that concern, and we're going to
Speaker 1: cover the wide spreads that a new e t F has.
Speaker 1: So I don't know, it's sort of representative of the
Speaker 1: hurdles that a new indie e t F has, and
Speaker 1: they're just addressing that in a common sense way. But
Speaker 1: it got you know, people just I don't know, they
Speaker 1: their intuitions start to smell like some sort of a gimmick.
Speaker 1: But if you dig in, I didn't think it was
Speaker 1: that irrational. It's a gimmick, but it might be one
Speaker 1: that we see again because again, the the that moment
Speaker 1: that somebody launches the problem is they don't have assets.
Speaker 1: So how do you get assets? Like give them, incentivize them. Yeah, exactly.
Speaker 1: I think I would say that the one caveat to
Speaker 1: all this kind of like fee cutting that we're seeing
Speaker 1: is that if you are already invested in one of
Speaker 1: these funds, there needs to be a reason. Potentially that
Speaker 1: reason is cost, but they need to see a good
Speaker 1: reason to kind of shift from one to another. And
Speaker 1: when you sell a fund, you are obviously incurring various
Speaker 1: trading costs. You also may be incurring a tax bill
Speaker 1: if that fund has gone up over the past year.
Speaker 1: So when thinking about switching from something that maybe charges
Speaker 1: twenty basis points something that charges ten basis points, you
Speaker 1: need to kind of be aware of that it may
Speaker 1: be worth it, particularly if you're going to be holding
Speaker 1: something for for the long haul and you don't want
Speaker 1: to be paying that that annual fee. But it's something
Speaker 1: to consider. By the way, just as we end this, uh,
Speaker 1: just this morning, black Rock announced it was cutting the
Speaker 1: fee on its SMP five hundred index mutual fund to
Speaker 1: point oh one to five, which would undercut fidelity by
Speaker 1: seventy five dred of a basis point. So now that's
Speaker 1: the cheapest points. Yeah, that cheap so uh. And then
Speaker 1: there was some fee uh some really low cost ets
Speaker 1: being launched in Europe in the middle of all this
Speaker 1: as well. So this isn't really just relegated to e
Speaker 1: t F, so it's actually spreading to other fun types
Speaker 1: other countries. Um, this thing is not going away anytime soon. Okay,
Speaker 1: we'll step back for a second and let's let's put
Speaker 1: a bull on this. What is the in game gonna
Speaker 1: look like? Here resounding silence. I mean, I think the
Speaker 1: endgame looks something kind of like where we're actually at.
Speaker 1: I don't think that this is going to be a
Speaker 1: case where all funds end up cutting to zero or
Speaker 1: below in order to be successful. I mean, if you
Speaker 1: look at kind of the larger asset managers, you know
Speaker 1: they have position in the market already. They do already
Speaker 1: have assets, and they're going to look to defend this.
Speaker 1: There's no interest necessarily for them in cutting all of
Speaker 1: their products to zero. If they're doing well and gathering
Speaker 1: assets with something that charges ten basis points, they're gonna
Speaker 1: keep something kind of around ten basis points. But for
Speaker 1: newer issuers that do want to make a splash, I
Speaker 1: think we will see a succession of those come out
Speaker 1: with zero or below zero kind of incentives to try
Speaker 1: and get those headlines. After a while, though, you know,
Speaker 1: people like anybody, kind of gets bored of this sort
Speaker 1: of things until once it starts being kind of a commonplace,
Speaker 1: then people will need to think about something else that
Speaker 1: makes them stand out. I agree with all that, I
Speaker 1: would maybe out also. Sometimes when I see the vision
Speaker 1: of all this, I see it looking like the airline industry,
Speaker 1: where you have three big carriers basically competing on cost
Speaker 1: every day, giving you routes everywhere, and they control the market.
Speaker 1: I see a lot of consolidation. You have three companies
Speaker 1: which basically give you these core portfolios for nothing or
Speaker 1: two basis points. And then on the outskirts you have
Speaker 1: these sort of niche airlines like you know, Alaska Air
Speaker 1: or private jets, and those would be like alternatives hedge funds,
Speaker 1: themes innovative products that do certain specialized things, and those
Speaker 1: will be sort of sprinkled on the outside of the
Speaker 1: portfolio and people will pay up a little more for those,
Speaker 1: at least for a while. Some of that will probably
Speaker 1: come down to but um, I don't see anything stopping
Speaker 1: that future scenario. But the catalyst would have to be
Speaker 1: a bear market. A bear market would be what starts
Speaker 1: to reshape this, and that the basically the ramifications of
Speaker 1: all this organic growth going to stuff that doesn't charge anything,
Speaker 1: we'll start to show itself in the market. Rachel Evans
Speaker 1: and Bloomberg News as always Thank you so much for
Speaker 1: joining us on Tryans. Thanks for listening to Trillions until
Speaker 1: next time. You can find us on the Bloomberg terminals,
Speaker 1: Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you
Speaker 1: like to listen. We'd love to hear from you. We're
Speaker 1: on Twitter, I'm at Joel Webber Show, He's at Eric Faltunas,
Speaker 1: and he can find Rachel at Rachel Evans. Underscore in
Speaker 1: Why Trillions is produced by Magnus Hendrickson. Francesca Levy is
Speaker 1: the head of Bloomberg Podcast. Bye.