Source's launch of 13 new funds last week marked the arrival of a major new issuer in the European exchange-traded products market.

The launch of an ETF "platform", with backing from several financial institutions, was a topic that we covered in a recent feature. But Source's pricing policy went against the grain of recent competitor launches, which have been characterised by falling fund fees. Is this a sign that a long-standing trend towards cheaper management charges is about to change? And what should one make of the issuer's decision to list funds on a single European exchange, the Deutsche Boerse, rather than cross-listing its ETFs in different European countries?

In a recent blog, we highlighted some recent research from Debbie Fuhr's team at Barclays Global Investors, which showed that European ETF average fee levels had converged with those in the US, at 31 basis points per annum.

There are still some differences between the two markets-to give two examples, Europe still cannot match the ultra-low fees on offer from US large-cap equity ETFs, which average 12 basis points, while the more institutional investor base in Europe means that there is no real equivalent to the multi-billion US leveraged and inverse leveraged funds sector, which is popular with retail investors, and where the typical fee is 95 basis points.

The downward pressure on European ETF fee levels has been helped by competitive pressures, which are driven, in turn, by the arrival of new issuers. Prior to Source's debut, there were three major launches in the European exchange-traded products market over the last year-by ETFlab, CASAM and Comstage. When promoting new ETFs tracking commonly-used indices, each of these firms has generally undercut the prevailing fee levels in order to attract business. This policy was explicitly stated in recent interviews with Index Universe by Valerie Baudson of CASAM and Ralph Stemper of Comstage, available here and here.

The three firms' ETF ranges have met with modest success so far, if assets raised are used as a measure. According to the latest edition of the Deutsche Bank ETF Liquidity Trends publication, ETFlab, CASAM and Comstage currently have funds under management of €1.4, €1.5 and €1.9 billion, respectively, representing 1.2%, 1.3% and 1.6% of overall European ETF assets. Both CASAM and Comstage have stated targets for future funds under management: €10 billion in assets by 2011 for the French issuer, a top three position for the Commerzbank subsidiary. Fund fee levels have clearly been set as a means to achieve these objectives.

The 13 Source equity ETFs launched last week are conspicuous for failing to continue the trend of declining fees. With the exception of the Source DJ Stoxx 600 ETF, which is cheaper by one basis point than the comparable db x-trackers ETF, all the Source funds have fees that either match or exceed the cheapest equivalent European fund, as is shown in the table below.

Index Universe asked MJ Lytle, director of marketing at Source, to comment on his firm's ETF pricing policy, and to explain why fees were in some cases set at a premium to those on competing funds.

Lytle explained that Source has decided to match the fees of the lowest-priced, most relevant fund, but didn't want to chase the lower fees being set by some competing firms. In other words, Lytle said, the size of a competitor's fund was more relevant than the absolute level of fees quoted when Source decided how to set its own expense ratios.

When asked how Source intends to gain assets if fees are set only to match those of existing benchmark ETFs, Lytle said that Source views the undeveloped part of the European fund management industry as a much more important opportunity than gaining market share from competitors. In the US, he added, ETFs represent 4.6% of the total fund management sector, whereas in Europe the €120 billion invested in ETFs represents less than 1.5% of the total €9 trillion or so in the funds sector. The ETF "penetration gap" in Europe is therefore over €200 billion, suggesting that there's a lot more to gain from sharing in the overall market expansion than in engaging in a market share grab, argued Lytle.

1 | 2 |