Saturday, September 11, 2010
The joy of competition
The Motley Fool (UK) reports (link) that HSBC is making a play for a share of the ETF market (wiki), currently dominated by the eight-hundred pound gorilla that is Barclays' iShares. Over the past year, they have set up a stack of ETFs duplicating some of Barclays' most popular, and have now slashed their total expense ratios: in some cases, to levels which are startlingly lower than Barclays'. At the head of the pack, their S&P 500 ETF, which tracks the 500 largest American companies, has a TER of 0.15%, against Barclays' 0.40%. Even at the lower end, their FTSE 100 tracker beats Barclays' at 0.35% against 0.40%.This may seem like a small difference, but it matters. ETFs are a low-cost way for people to manage their own retirement savings, and so investors will benefit from the decrease. Since they are generally going to be held over the long term, a small difference in TER can make a noticeable difference in relative performance: over thirty years, a 0.4% fee will erode the final value of the fund by about 7.3% relative to a 0.15% fee (which in turn erodes capital by 4.4% relative to no fee).Secondly, however, there was a fun bit of research conducted a while back which linked fund fees with performance very strongly. The fun is in the irony that it was conducted by a fund provider and supermarket, which has an interest in high-fee funds, but showed that low-fee funds typically outperform their high-fee competitors (src). The take-home slogan in the investing world has been that the most reliable predictor of fund performance is the fund's fees: the lower, the better. Many small investors, I suspect, have long shared a feeling that fund managers are poor value for money: this study suggested that in fact, fund managers are, net, negative for investors. Consequently, cheap 'n' cheerful trackers are a very sound investment strategy, and the cheaper the tracker, the more cheerful the investor.The ETF market has been a one-horse race for a little too long. HSBC's move to make its fees more competitive should shake things up a little, and the competition can only serve consumers well.Disclaimer: I hold some iShare units in a fund which HSBC is not presently duplicating.