Among the 184 listed ETFs in China, 17 products are charging the lowest management fee of 0.15% while 155 ETFs have a management fee of 0.5%, according to China data provider Wind.
“There are indications that leading companies that already have a larger scale of ETF products may become promoters of the war of fees. When the scale of the ETF product exceeds the product break-even point, its marginal cost will drop, and the fund houses will have sufficient space to win the war, thus pushing the weak competitors out of the market,” according to a report from local language publication Securities Times.
“Considering the huge space for the development of ETFs, once a [competitive] oligopoly is formed, the potential benefits will be much higher than the costs lost by the current fee wars,” the report added.
At the same time, the development and management of ETF products, which involve hardware and software, manpower and other inputs, is a substantial cost, the report said.
“Therefore, if the management fees cannot reach a certain level, it will be difficult to cover the daily operating costs of the ETFs. However, the fee reduction will obviously raise the threshold of survival, and a group of fund houses will be squeezed out of the competition,” the report said.
Offshore ETFs
Looking at the overseas market, the total fees of ETF products from Vanguard is generally 0.03%-0.04%, and the total fees of ETFs from Blackrock is generally 0.05%-0.3%. Therefore, there is still room for downward adjustments of domestic ETFs fees, the report noted.
However, the report also said that “an important factor of the low rate and even zero rate of foreign ETFs is that there is a difference between their business models and domestic ones”.
It has been estimated that in the US market, an ETF should have $100m in assets in order to remain a viable product for investors, according to a Morningstar report.
Similarly, in Hong Kong, the high cost of running an ETF requires a certain AUM threshold to break even on product costs.
Last month, CSOP AM filed to delist its China CSI 300 Smart ETF whose last trading day will be 22 November 2019. Launched in 2015, the product’s AUM today is only HK$7.52m ($960,700).
In July, the firm also cancelled the CSOP WTI Oil Annual Roll December Futures ER ETF.
Tony Wong, head of wealth solutions and sales and product strategy at CSOP AM declined to comment on the minimum AUM that would trigger a delisting.
However, Hong Kong-based Enhanced Investment Partners estimated that $25m in AUM and at least $500,000 in daily turnover is necessary for an ETF to cover product costs, FSA previously reported.
