Many funds have specific rules on how many of the shares can be lent to short-sellers with numbers ranging somewhere between 20% to 50% of their total assets. Secondly, a zero-cost ETF or Index Fund can also serve as a facilitator for selling more complicated products on the issuer´s shelf. And a large ETF as such can provide a certain value through its market insights, money flows and data points associated with it.
From my perspective, the pressure on ETF issuers to lower their existing costs will continue. And index providers are part of that game. In a world where some major index providers still operate with margins north of 70% and charge basis points in fees for plain market cap weighted indices, it won’t come as a surprise that also the indexing world is facing major disruptions. Automation is driving costs down, and is opening doors for disruptive, flat-fee models and different service levels – just ask your cab driver about UBER.
Looking at major expenses of ETFs, we can see where they are heading. Starting with listings, they are nowadays often offered free of charge or actually even being paid for by the exchanges. I already mentioned above the disruptive potential of Blockchain technology on custody and think it is fair to say that this will also drive expenses down further. That leaves us with index fees: traditional index providers will often tell you that their index adds value to an ETF, while I believe, it´s actually the opposite. Especially for pure beta, market cap weighted indices, an index provider can gain a lot of exposure and reputation through a giant ETF tracking such indices. Should the index provider pay a premium in such cases? Yes, I am sure such a “negative fees” scenario is not far away any more. So, dear SPY out there, are you listening?!
Consequently, will the race to zero really end at zero? I don’t think so.
This article was written and republished with permission from Timo Pfeiffer, Head of Research & Business Development at Solactive.
Solactive AG is an innovative index provider that focuses on the development, calculation and distribution of tailor-made indices across all asset classes. As at January 2018, Solactive AG served approximately 400 clients in Europe, America and Asia, with approximately USD 200 billion invested in products linked to indices calculated by the company globally, primarily via 350 exchange-traded funds from a number of well-known providers. Solactive AG was established in 2007 and is headquartered in Frankfurt.
The information in this document does not constitute tax, legal or investment advice and is not intended as a recommendation for buying or selling securities. Solactive AG and all other companies mentioned in this document are not responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission. Solactive AG, Guiollettstr. 54, 60325 Frankfurt am Main, Germany. Registered Office: Frankfurt am Main, Registration Court: Amtsgericht Frankfurt am Main, HRB: 79986, USt-IdNr.: DE 255 598 976. Management Board: Steffen Scheuble, Christian Grabbe, Dirk Urmoneit and Christian Vollmuth, Head of Supervisory Board: Dr Felix Mühlhäuser.