Zero-fee ETFs “a gimmick”, says HANetf

Mar 28th, 2019 | By | Category: ETF and Index News

Arguably since Vanguard‘s entry into the ETF market, a price war has emerged among ETF providers with new product launches commanding fees of less than 10 basis points increasingly being considered the norm.

Zero fee ETFs aren’t worth the price, says HANetf

Hector McNeil, co-CEO of white-label ETF provider HANetf.

Last year also saw the launch of the first zero-fee index fund in the US as providers race to the bottom on charges.

However, while price competition between passive providers has benefitted the investor, the emergence of zero-fee ETFs would simply be “a gimmick” and investors “need to be wary”, says Hector McNeil, co-CEO of London-based white-label ETF platform HANetf.

The ETF industry veteran argues that, while they may initially seem appealing, ETFs with no charges will actually put the investor at a disadvantage.

He says, “It’s worth remembering zero fund fees are a misnomer – it’s like when you apply for a mortgage and see all the special offers, but when you look at the small print you see all sorts of clauses.

“Essentially, it’s just a gimmick to get people on to a given platform to start with.”

This, McNeil says, is the point when investors tend to be stung with hidden drawbacks: “It’s not good for the end consumer because price should only be one factor when making an investment choice.

“For example, while you may pay zero fees for one tracker, you may have to shift your money on to a specific platform, which could cost more money and leave you out of the market for a significant period of time. Furthermore, there is the risk that you may also then find you have a limited choice of other funds or products (assuming you do not only buy the single, zero-fee tracker).

“Investors should assess whether the cost and hassle of moving is worth what will be, in all likelihood, a very minuscule saving versus other ETFs.”

McNeil adds that zero-fee ETFs are actually not a new tactic with some being launched a decade or so ago but later quietly dropped by the provider.

Deutsche Bank’s db X-trackers unit, now a part of DWS, lowered the fee on its Euro Stoxx 50 ETF to 0.00% in July 2009. Its successor ETF now charges 0.09%.

“You may well see more firms do such gimmicks as this, but for us, that is precisely what it is, and investors need to be wary,” says McNeil.

McNeil adds that the European market is quite different from the US market, where passives have taken a much larger market share. He therefore believes it is unlikely that zero-fee products, should they be launched in Europe, would be well received.

“It will be harder for this to take root in Europe because it is more competitive here, with far more indices to monitor and focus on,” says McNeil. “The audience is also far less ‘retail’ than the US.”

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