The Ongoing Price War In The European ETF Market Is Bad News For Deutsche Bank

Over the last few quarters, asset manager Vanguard has seen strong growth in its funds by cutting fees for a number of its exchange-traded fund (ETF) offerings. Aimed at attracting retail investors, the low-cost ETFs helped Vanguard report considerably higher inflows in the U.S. over the first quarter of the year compared to its bigger competitors BlackRock (NYSE:BLK) and State Street (NYSE:STT) (see Vanguard Trumps BlackRock, State Street To Record Highest ETF Inflows In Q1).

With a strong foothold in the U.S., Vanguard is now trying to replicate its success story in Europe. This has led to a price war in the region with key players in the ETF market slashing fees in a bid to grow their client bases. ^[1] We believe that only a few incumbents stand to gain from the ongoing price wars -including BlackRock, which can leverage its position as the world’s largest asset manager to spread expenses better across its global operations, and Vanguard, which has a proven track record with its low-cost ETF lineup. Notably, this will negatively impact Deutsche Bank’s (NYSE:DB) plans of gaining a larger share of the ETF market in its home country of Germany.

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The best indicator of the popularity of ETFs and other exchange traded products (ETPs) is the fact that the industry grew to larger than $2.5 trillion earlier this year from being a largely obscure investment option at the turn of the century. ^[2] The reason for this growth is that ETFs provide investors a cheap and convenient way to put their money into fixed income, equity, currency, commodities and other investment markets. And with the popularity really only skyrocketing in the past few years, the industry has the potential to continue to grow considerably in the future.

The ETF market in Europe is dominated by BlackRock, Vanguard, Deutsche Asset & Wealth Management (DAWM) – the asset management arm of the largest German bank – and Lyxor – a part of Société Générale. In response to the growing popularity of ETFs by BlackRock and Vanguard over recent years, DAWM implemented a round of price cuts to its ETFs this February with a target of capturing a 20% share of the German ETF market by the end of 2015 from around 12.5% now. ^[3] But over recent months, the competition has intensified considerably, with BlackRock slashing expense ratios for six of its existing European ETFs by almost 60% and also introducing eight new low-cost ETFs in June. ^[4] More recently, Vanguard announced a series of price cuts of its own – essentially taking away the cost advantage Deutsche Bank was using to market its ETFs to retail as well as institutional investors.

The problem for Deutsche Bank in the European ETF market is that retail investors are known to pull out their cash from a more expensive ETF to a cheaper ETF with comparable performance. It will therefore be more difficult for DAWM to meet its target of nearly doubling its share of the German ETF market by the end of next year, as there is little to differentiate its ETFs from those by the much larger and successful ones offered by BlackRock and Vanguard. This points to a slower growth in ETF assets for DAWM over coming years. You can understand the impact of this on Deutsche Bank’s share price by making changes to the chart above.

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1. Vanguard stokes ETF price war in Europe, Financial Times, Aug 28 2014 [↩]
2. Global ETF industry hits US$2.5tr, InvestorDaily, Jun 19 2014 [↩]
3. Deutsche Bank cuts Europe ETF prices to win institutional business, Reuters, Feb 10 2014 [↩]
4. BlackRock Cuts Europe ETF Fees in Race With Vanguard for Assets, Bloomberg, Jun 1 2014 [↩]