State Street Ups Ante In European ETF Price Wars With Another Round Of Price Cuts

December 17th, 2014 by Trefis Team
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Earlier this week, State Street (NYSE:STT) announced plans to slash the expense ratios for two of its popular European exchange-traded funds (ETFs) by roughly 20%. [1] This move follows a much larger round of price cuts announced by State Street in late September, when the global custody banking and asset management giant lowered the expense ratios of 15 of its core equity and fixed income ETFs. [2]

Over the last few quarters, the world’s largest asset managers have been locked in a price war over their ETF offerings in Europe, as all of them target retail investors in a bid to increase their market shares in the rapidly growing industry. The ETF market in Europe is primarily dominated by BlackRock (NYSE:BLK), Vanguard, Deutsche Asset & Wealth Management (DAWM) – the asset management arm of Deutsche Bank (NYSE:DB) – and Lyxor – a part of Société Générale. State Street’s decision to introduce another round of price cuts shows that it is looking to aggressively grow to be one of the top three ETF providers in Europe.

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The ETF industry has grown to its current size of almost $2 trillion despite the fact that it was a largely obscure investment option at the turn of the century. 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 largest avenue of growth for ETF providers over coming years is expected to be the retail investor market, which remains extremely under-served. As retail investors are much more sensitive to expense ratios, asset managers have been trying to attract them with a string of low-cost ETFs. This in turn has triggered a price war among incumbents in the ETF industry – largely thanks to the popularity of low-cost, core ETFs from BlackRock and Vanguard. After all, BlackRock can leverage its position as the world’s largest asset manager to spread expenses better across its global operations, and Vanguard has seen the best growth among retail investors thanks to the proven track record of its low-cost ETF lineup.

DAWM started the trend of cutting expense ratios in February with a target of nearly doubling its share of the German ETF market by the end of 2015. [3] The competition intensified considerably in June, when BlackRock slashed the expense ratios for six of its existing European ETFs by almost 60% and also introduced eight new low-cost ETFs. [4] Within months, Vanguard announced a series of price cuts of its own. ((Vanguard stokes ETF price war in Europe, Financial Times, Aug 28 2014))

After holding out until late September, State Street finally gave in and cut fees on 15 ETFs from the range of 15 to 65 basis points (0.15-0.65%) to 9 to 55 basis points (0.09-0.55%) – a reduction of between 15-60% in price. [2] The largest cut was imposed on State Street’s SPDR S&P 500 ETF – the world’s largest ETF. The recently announced cuts apply to SPDR MSCI Europe Ucits ETF and the SPDR MSCI Europe Small Cap Ucits ETF, with the former seeing expense ratios fall 17% (from 30 to 25 basis points) and the latter seeing a larger 25% cut (from 40 to 30 basis points). [1]

While the price cuts are good for the overall growth of State Street’s asset base (shown in the chart above), it will put pressure on the fee income earned by the asset manager in the future. We believe that the ongoing price wars among asset managers globally will continue to drag down fee income represented as a percentage of total assets (shown in the chart below) in the coming years. You can see how this impacts State Street’s share price by making changes to the chart below.

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Notes:
  1. State Street cuts fees on two European ETFs, City Wire Wealth Manager, Dec 16 2014 [↩] [↩]
  2. State Street fires back in ETF price war, Financial Times, Sept 30 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 [↩]