Resident ETF columnist, Allan Lane of Algo-Chain writes on the Innovator’s Dilemma…
It has been a few weeks since Amundi parked their tank on iShares' and Vanguard's lawn, when they launched their 'Prime' family of nine core ETFs, all with a rock bottom management fee of 0.05 per cent per annum. Their strategy is based on the view that In Europe the ETF industry is set to undergo extensive growth, providing a textbook example of what is generally known as the Innovator's Dilemma.
As a youngster, one of my favourite puzzles was Spot the Difference, a game which involved listing as many differences between two seemingly identical cartoons. Invariably under closer inspection in one picture the donkey would only have three legs, compared to the four shown in the other one. And so it is with many recent ETF launches where more and more issuers are re-packaging what are in essence existing products.
I’m all for it when an ETF provider launches a suite of low-cost products, but I suspect it does take the fun out of the day job for some of their competitors. What's noteworthy about Amundi's launch is the decision to work with Solactive, one of the less well-known index providers, but well known for their low-cost products. I can imagine the almost certain agony that their strategist team will have endured as they pushed ahead with their plan.
For those of you not familiar with Clayton Christensen’s 1997 book, The Innovator’s Dilemma, basically it's the playbook that epitomises the challenge all big firms face as they are forced to compete in ways that at best cannibalises their existing revenue streams. New entrants to the market are often leaner and meaner, and nine times out of 10, this translates into a much lower cost offering.
Focusing on the UK listing of the Amundi Prime Global UCITS ETF, with ticker PRIW, this ETF tracks the Solactive GBS Developed Markets Large & Mid Cap USD index. Fair play to their CEO Steffen Scheuble; securing this deal with Amundi across all nine of the Prime ETF launches seems quite a scoop. Comparing the sector and country breakdown and indeed the top holdings with Amundi’s similar ETF which tracks the MSCI World Index, it's hard to spot any discernible difference. Indeed, they almost have the same number of holdings in the portfolio, 1623 in one case and 1655 in the other.
Not wishing to hark back to my favourite childhood game which involved counting the number of legs on the donkey, in this particular instance I can't help noticing that Amundi's two almost identical ETFs come with entirely different management fees. The MSCI benchmarked fund costs 0.18 per cent per year, which is almost four times as expensive as the Solactive benchmarked fund.
It was a very brave decision by Amundi to take these radical measures, and although it is way too early to assess how successful this strategy will prove, if the US market is anything to go by, then the lowest fee ETFs attract a lot of the net new core assets. As the future unfolds, I am hard pressed to see how the next generation of investors will be prepared to pay such a premium for the better-known index brands. For a while it was just the ETF issuers that were feeling the 'price war' pain, but this has now been felt by the index providers. I look forward to seeing how they respond.
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