As one of the most recent entrants into the ETF industry, South Africa-based Old Mutual faces a tough road to taking market share away from the well-established firms and funds that dominate the industry. Earlier this week, the firm shed some light on its strategy for competing with the first movers in the ETF space, announcing a significant price cut to its most popular ETF. Beginning June 1, the net expense ratio on the GlobalShares FTSE Emerging Markets Fund (GSR) will be cut from 0.35% to 0.25%, making it the cheapest ETF in the Emerging Markets Equities ETFdb Category.
This isn’t the first time Old Mutual has attempted to differentiate its products on the basis of price; when GSR was launched in late 2009, the initial expense was 0.0%–a first in the ETF industry. Of course this offer was for a limited time only, and the cap expired at the end of January.
There are reasons to believe that ETF investors are beginning to consider costs more carefully when constructing portfolios. The best example involves two ETFs against which GSR competes: the iShares MSCI Emerging Markets Index Fund (EEM) and Vanguard Emerging Markets ETF (VWO). Both of these ETFs seek to replicate the MSCI Emerging Markets Index, but the expense ratios are drastically different; EEM charges 0.72% while VWO charges just 0.27%.
As one of the first U.S.-listed emerging markets ETFs, EEM has historically relied on greater trading volumes and more widespread option availability as distinguishing features. But over the last year VWO has seen as surge in cash inflows, while EEM has at times sputtered. According to figures from the National Stock Exchange, VWO’s assets grew from $6.6 billion in April 2009 to more than $24 billion a year later. During that same period, EEM’s assets expanded from $25.8 billion to $35.8 billion. If recent trends continue, it’s feasible that VWO could be bigger than EEM by the end of the year.
Now GSR is undercutting VWO–at least for the next 12 months–in an attempt to gain ground on its competitors. Other ETF issuers are no doubt watching this experiment with great interest. If GSR’s assets see a material bump, it could be the beginning of a series of ETF price wars.
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Disclosure: No positions at time of writing.