Impact of fees on ETP revenue and net funds flow

Exchange Traded Products (ETPs) with management fees above 0.65% pa face significant challenges attracting investors unless they offer a unique value proposition.

While revenue growth is less impacted by fees, products with higher fees, above an estimated 0.65% pa, find it increasingly difficult to attract investors unless they offer a unique and practical value proposition, according to the latest Rainmaker Information Exchange Traded Products Report.

Unlike unlisted unit trusts where performance drives inflows, ETP investors are far more sensitive to fees.

“Products with lower fees consistently experience higher net flows relative to peers,” said John Dyall, head of investment research at Rainmaker Information.

“While performance and innovation remain important, pricing is the deciding factor in an increasingly competitive ETP landscape”.

“Products with low fees continue to show stronger net flows, demonstrating investor sensitivity to cost.”

Using a sample of 331 ETPs with at least 12 months of history, Rainmaker Information compared management fees against both net funds flow and changes in revenue.

The relationship between fees and net flows was found to be strong, with an R-squared of 0.7, compared to just 0.3 for the relationship between fees and revenue, showing that fees are a far greater driver of investor behaviour than revenue performance.

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The research identified two market segments: Products with management fees below 0.65% pa and those above this threshold.

In the primary segment, 10 products increased their revenue by more than $2 million each. Fees ranged from 0.07% pa for the Vanguard Australian Shares Index ETF to 0.59% pa for the VanEck MSCI International Small Companies Quality ETF.

Half of the ETPs were Vanguard products, four were from VanEck and one is offered by Betashares (the Betashares NASDAQ 100 ETF).

In the second segment there were 59 products with management fees higher than 0.77% pa. Of these, three increased revenue by more than $0.5 million. Fees ranged from 1.1% pa to 1.38% pa. Two of these were actively managed international shares products from Aoris (one currency unhedged, the other currency hedged). The other was the Betashares US Equities Strong Bear Currency Hedged Complex ETF. While these three products also had significant positive net flows over 12 months, this was not enough to counteract the negative net flows of the rest of the more expensive products.

“ETP managers should pay close attention to their fee structures. Unless a product has a highly unique value proposition, fees above 0.65% pa significantly limit the likelihood of success,” said Dyall.