Fitch: Index Fund, ETF Price Competition Rising for U.S. Banks
CHICAGO -- January 29, 2013
Price competition among providers of mutual funds and exchange-traded funds
(ETFs) is likely to put pressure on investment management fee growth for U.S.
trust and custodial banks, according to Fitch Ratings. Recent moves by
Fidelity, Vanguard, Schwab, Blackrock, and other fund managers to reduce index
fund and ETF fees paid by increasingly cost-conscious investors will make it
difficult for trust banks, such as State Street, Northern Trust, and Bank of
New York Mellon, to push through meaningful fee growth on individual and
institutional customer accounts.
While the major U.S. trust banks all reported investment management and
servicing fee growth in 4Q12 as a result of stronger equity markets and some
new business, they have been forced to adjust pricing strategies in ways that
may erode profitability of this core business that touches multiple revenue
streams, particularly if trading volumes and investment inflows remain weak.
This price competition is particularly relevant in the plain vanilla index
space, which serves to replicate investment returns of bellwether indices such
as the S&P 500 and Dow Jones Industrial Average, among others. As a result,
some of the larger asset managers and trust banks are launching more niche ETF
and index products in areas such as commodities and emerging markets.
These newer products have the benefit of capturing the strong demand in the
marketplace for more index-like products, providing clients with exposure to
less developed and higher growth sectors. They also carry higher management
fees than the more traditional products noted above.
Since the financial crisis, net outflows from actively managed funds into
index products and ETFs have made it more difficult for managers of higher
cost products to compete. The growth of ETFs, with low expenses and no
restrictions on trading throughout the day, is posing a threat to actively
managed funds in both the retail and institutional channels.
Furthermore, we think that a race to the bottom in fees for index funds and
ETFs likely signals the growing importance of scale in the asset management
business, with slow fee growth and lower margins discouraging market entry by
competitors. In a more mature industry, with consolidation largely complete,
smaller competitors in the index fund and ETF space will find it increasingly
difficult to challenge incumbents, while future price competition from the
existing large incumbents is likely.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Justin Fuller, CFA, +1-312-368-2057
Bill Warlick, +1-312-368-3141
70 W. Madison
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549
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