The European ETF market has grown and evolved significantly since the first launch 18 years ago. There are now over 60 issuers and 2000 ETFs competing for asset flow from institutional and retail investors alike. But issuers are not the only ones to benefit from this boon. In parallel, the ETF ecosystem has grown and evolved too. Banks, trading houses, exchanges, index providers and asset servicing firms have all invested and developed their businesses to compete for ETF flows and assets.
The ETF space has become increasingly competitive with issuers looking to differentiate themselves through the launch of niche and innovative products, and through the reduction of headline fund fees on core ETF ranges.
The low cost nature of ETFs relative to active mutual funds has been an attractive feature for all types of investors and helped ETFs become one of the most popular investment vehicles.
The headline fee for ETFs, has for many years been the total expense ratio (TER): however, this does not capture the full costs of owning an ETF. In recent years, issuers have promoted the total cost of ownership (TCO) as a measure of the full costs that can drag on an ETF's investment return over time. The TCO includes other fund costs and liquidity costs. Liquidity costs are driven by a number of factors, one of those being the efficiency of the specific ETF range's primary market.
Given the importance of the primary market in driving secondary market liquidity, and by extension, an ETF investor's TCO, we set out to explore how an issuer's choice of asset servicing firm could impact their ETF investors' TCO, and if so, to what extent.
KPMG met with ETF issuers and APs to conduct a survey of current experiences with ETF service providers, and to understand their views on how ETF servicing drives secondary market liquidity and an investor's TCO.
We asked key issuers and APs the following core questions:
Both existing and new issuers will be well placed to review their asset service arrangements and ensure that they are receiving leading levels of service that can help reduce their investors' ETF TCO. In the same way 'not all ETFs are created equal` - 'not all ETF service providers are the same'. Partnering with the right ETF service provider can make an issuer's ETFs more competitive by reducing the total cost of ownership.