Pinnacle kicks off race to zero-fee ETFs

A local boutique is planning to launch Australia’s first zero fee exchange-traded fund.

Pinnacle Investment Management is aiming to bring a zero-fee cash ETF to the ASX, managed by Omega Global Investors and says there may be room to implement the model in other asset classes.

The “zero fee” applies to the investment management fee only. Investors will still have to pay between four and 15 basis points per annum, according to Pinnacle head of retail Ramsin Jajoo.

“We are not looking to break even on this product, its [other costs] will be funded from our own balance sheet,” Jajoo told Financial Standard.

“What we are aiming for is that once the investors have a pleasant experience with us, they become more comfortable in investing with us.”

While Pinnacle’s ETF may not be completely free, it indicates advisers and investors are hungry for lower-cost ETFs.

And there are enough drivers for ETF issuers to deliver for this appetite: Aussie ETF assets have just crossed $50 billion, competition is fierce and with Pinnacle’s zero-fee ETF, issuers are willing to sacrifice profit for a longer client relationship.

Analysis of 29 ETFs tracking market-cap weighted indices by Rainmaker head of investment research John Dyall found product issuers progressively trimmed the management expense ratios (MER) on such products as they gathered scale in the seven years to March.

During the period, 12 of the ETFs reduced the MER, with some lowering fees by more than 40%.

If this trend continues, the industry can expect exposures to become cheaper, by virtue of scale.

BetaShares chief executive Alex Vynokur says there is a relationship between an ETF’s FUM and its MER, which includes expenses paid to the index provider, fund administrator, auditor, and stock exchange.

“Potentially yes, all of these are negotiable based on the actual or more importantly, expected FUM for an ETF,” Vynokur says.

However, this has not always played out in Australian ETFs.

Rainmaker found three outliers, which charged relatively high fees in respect to FUM at March end: the then $3.5 billion Vanguard Australia Shares Index ETF, $3.6 billion SPDR 200 fund and iShares Global 100.

And so, perhaps a more effective driver for lower fees is competition.

One of the outliers, the Vanguard Australia Shares Index ETF has since lowered fees, following BlackRock and BetaShares’ lead. But how much cheaper could ETFs get in Australia?

Zenith head of property and listed strategies Dugald Higgins believes Australia will be more resistant to fee pressure.

Many ETF issuers have not raised enough FUM to break even on some products. It might as well be that core-type exposures become lossmaking for ETF issuers and the satellite exposures will be where they make their money,” Higgins says.

“If it’s going to happen, we need a larger investor base, which is tough in a country of just 25 million people unless it becomes a lot easier to trade ETFs overseas.”

Both Vynokur and Higgins liken zero-fees to “honeymoon rates” – the good deal doesn’t last. And there is the fact that managing cash is a low-management-fee endeavour anyway.

However, Jajoo thinks the zero-fee model has potential beyond just cash products.

“The important point is the expenses are capped at 15bps,” he says.

“If you are only doing beta, you should be able to do zero-fee ETFs in many asset classes in the future,” he says.

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