Sunday May 30th 2021
The costs go down
Equity ETFs are getting cheaper and cheaper
From Stefan Schaaf
Equity ETFs are now cheaper than bond ETFs. Ironically, the safe bond funds even sell out. Why is that?
Active and passive funds have been getting cheaper for years, which is mainly a result of the strong competition in the industry. While active funds are under pressure from growing passive business, the costs of exchange-traded funds (ETF) themselves are also falling. Last year, equity ETFs were even cheaper than those that track bond indices. This emerges from the statistics of the international fund association ICI, which also includes the German BVI.
The ICI examined the costs for Ucits-ETF on stocks and bonds, in other words, to put it simply, on exchange-traded index funds approved for trading in Europe, such as the German stock index Dax or the bond index “Bloomberg Barclays Euro Aggregate”. Complicated derivative products or commodity funds were not included.
In 2013, the average running costs (i.e. excluding trading costs for buying and selling) for a European equity ETF were still 0.39 percent. For every 1000 euros of investment money, 3.90 euros were spent on managing the fund. For many actively managed equity funds, the cost is 1.5 to 2 percent per year. In return, they offer the opportunity to outperform the broader market, which, however, many fail to achieve.
Equity ETFs have become almost a third cheaper since 2013, while their running costs averaged 0.26 percent last year. This was the first time they were cheaper than bond ETFs in the ICI data series. These cost an average of 0.28 percent last year and were even slightly more expensive than in 2013, when it was just 0.25 percent. This is particularly annoying for investors, because at the same time the regular distributions of the bond ETF (or the accumulation) have shrunk considerably due to ever lower interest rates.
Central banks buy bonds
One can only speculate about the reasons for the different cost developments in equity and bond ETFs. However, bonds are generally harder to trade than stocks. The problem could have been exacerbated by the central banks’ bond purchase programs, as this made many bonds even more illiquid and consequently more difficult to trade. Shelly Antoniewicz, executive director of economic analysis at the Investment Company Institute (ICI) in Washington DC, sees the cost trend as an indirect consequence of the low interest rates, which are making investors increasingly invest in emerging market bonds. “Emerging market stocks are more expensive to trade and custody than US Treasuries,” she told Capital.
In contrast, the trading costs for stocks have presumably decreased due to the strong competition from various platforms. Because DAX shares are no longer traded only on the Xetra platform of Deutsche Börse. Large investors like ETF providers have alternatives available. The competition for equity ETFs may simply be greater. Everyone who wants to create a savings plan on the Dax or the S & P500 can see the wide range.
In any case, the boom in ETFs is unbroken. “We’re seeing tremendous growth at ETF,” says Antoniewicz. “There were particularly strong inflows with equity ETFs.” According to the ICI, around 927 billion euros were invested in European ETFs in 2020, more than twice as much as in 2013. However, prices also rose sharply during this period. 1000 euros invested in a Dax ETF at the beginning of 2013 would have grown to around 2000 euros.
Regardless of the cost, Antoniewicz observes “an increasing demand” for both active and passive bond funds. “This trend is mainly driven by demographics, there are more and more people who are 65 years of age and older,” she says. “You go into these funds because they offer regular returns and less volatility than stocks.”
Investors sell bonds
In the corona crash on the capital markets, there were initially outflows from equity and bond funds, but these were very moderate compared to the total investment volume. Remarkably, bond funds came under significantly more pressure to sell than equity funds in March 2020, although investors actually switch from stocks to bonds during such phases. However, around 118 billion euros flowed out of active European bond funds in March 2020, and only 45 billion euros from equity funds. Euro. Antoniewicz explains this with the fact that, because of the very high level of uncertainty, many investors “wanted cash and therefore sold assets.” The prices of bonds had fallen far less than those of stocks. “What do you sell when you want cash – of course the assets that have held their value rather than realizing large losses,” says Antoniewicz.
However, investors did not stay in cash for very long; in April 2020, inflows into bond and equity funds began again. In November, the outflows from March were already balanced out for bonds, so that there is even a net inflow for 2020. In equities, things went even faster: the March outflows were evened out again in July, and the inflows literally swelled from November onwards. In the last two months of 2020, equity funds saw net inflows of 41 billion euros.
This text first appeared at Capital.
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