March 21, 2018 / 12:43 AM / a month ago

Price wars heat up as Lyxor launches low cost ETFs in Europe

LONDON (Reuters) - A wave of price cuts on exchange-traded funds (ETFs) accelerated on Wednesday when French asset management firm Lyxor launched what it said were the lowest cost ETFs in Europe.

Lyxor, a subsidiary of Societe Generale (SOGN.PA), unveiled four new ETFs and cut the fees on twelve existing ETFs in the latest move by an ETF provider to turn up the heat on competitors in an increasingly fierce price battle.

Price cuts have been rampant across the ETF industry, with the world’s largest asset manager BlackRock (BLK.N) also slashing fees.

ETF providers calculate they can absorb the up-front hit to revenues by hauling more cash in to their products.

“Today we are willing to play the role of the disruptor. We have the ability to identify what will be the impact on our profits of doing this extremely cheap fund versus a more expensive one,” Matthieu Mouly, CEO of Lyxor UK, said.

“These are not loss leaders, these are sustainable products,” he said.

The new ETFs track Morningstar’s UK and US indices, MSCI World and MSCI Japan. The UK and US trackers have a 4 basis point (0.04 percent) fee, which Lyxor said was the lowest in the European market, calling it a “floor”.

The fee amounts to 4 euros for every 10,000 euros an investor holds in the product. The new MSCI World and Japan trackers have a 12 basis point fee.

Inflows to ETFs have kept up their blistering pace this year, reaching a record $43.9 billion year-to-date, according to the latest EPFR flows data.

ETFs provide investors with exposure to a specific basket of stocks, bonds or commodities, often replicating indices such as the S&P 500. They are listed on exchanges and widely used by institutional and retail investors as cheap ways to invest in far-flung regions or obscure financial instruments which would ordinarily be difficult to access.

The ETF market is much bigger and more mature in the United States than in Europe, having been largely driven by retail investors who hold ETFs directly in their portfolios.

In Europe, ETFs are more intermediated with less direct share ownership among “mom and pop” investors. The retail share of the market has been growing, however, creating more of a rationale for providers to slash fees.

“In the U.S. particularly core exposures have been incredibly cheap for quite some time,” said James McManus, investment manager at Nutmeg, a British digital investment platform which runs portfolios for 50,000 clients using solely ETFs.

“Every basis point we can squeeze out improves our clients’ returns,” he added.

Increased pressure from regulators has also put investment fees in the spotlight. New European Union rules known as MiFID II came into effect in January in the latest push to increase transparency and limit costs to the end investor.

“It’s a normal move for an industry when it becomes more mature,” said Lyxor’s Mouly. “Clients are challenging us to do the same for cheaper.”

The new funds are listing on Deutsche Boerse on March 21 and the London Stock Exchange on March 22.

    Reporting by Helen Reid. Editing by Jane Merriman

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