Vanguard’s European Price Cut To Have Limited Impact: Citi

Updated on

Vanguard cut fees on 23 of its European passive products in a bid to keep costs to a minimum for investors as it increased its scale and operating efficiencies in the region.

Even before these cuts, Vanguard was the cheapest fund manager (expense ratio of 12 bps) in Europe, ahead of BlackRock, Inc. (NYSE:BLK) (36 bps) and Deutsche Bank AG (NYSE:DB) (ETR:DBK) (35 bps), according to data provider ETFGI.

Vanguard’s raging price war

Last year, Vanguard changed its index provider from Msci Inc (NYSE:MSCI) to FTSE 100 (INDEXFTSE:UKX) in order to shave operating costs. In the US, Vanguard aligned cost structures of its passive mutual fund products with those of ETFs last month.

According to FT, the raging price war amongst ETF providers in the US has now crossed the pond to Europe. Vanguard is globally the third-largest fund manager, and its European ETF AUM have just topped $3B.

Vanguard’s pricing changes will affect a range of equity and fixed income mutual funds and the total expense ratio for the Vanguard FTSE Emerging Market ETF.

“We continually seek to reduce expenses and improve service in an effort to enhance our overall value proposition to clients and give them a better chance for investment success,” said Tom Rampulla, managing director for Vanguard in Europe.

Implications for rivals BLK and IVZ

“We do not see a material impact to iShares for three reasons: 1) Vanguard cut fees on 22 index MFs and only one ETF, or less direct competition; 2) Vanguard lowered the fees on their Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) which is also not direct competition to iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) (as well as a much smaller (AUM) fund at present); and, 3) volumes in iShares Europe have been solid YTD. For much the same reasons, we do not expect any material impact to IVZ’s Powershares platform,” says Citi’s William R Katz.

What about the asset management industry as a whole?

According to Citi, the pricing challenge by Vanguard is likely to have only a limited impact in the short term. What is of concern, however, is that the price war could work to the detriment of the traditional mutual fund industry as passive products bulk up in terms of AUM – a more long-term fallout.

Anyhow, that should be mitigated by encouraging flows that point to the return of the retail investor, says Citi.

Leave a Comment