A fresh wave of fee cuts from iShares and db X-trackers, Europe’s largest ETF providers, has prompted Morningstar analysts to upgrade two ETFs.
Amongst the cuts was the iShares S&P 500 Dist ETF (IUSA), which slashed its ongoing charge from 0.40% to 0.07%, bringing it into line with its accumulating stablemate the iShares Core S&P 500 ETF (CSP1).
In response, it has been upgraded from a Bronze to a Gold rating to match our most highly regarded S&P 500 trackers. The previous rating differential reflected the gaping disparity in price between the ETF and its direct peers, most of which charge a fee of less than 0.15%. The long overdue move lifts the fund from being an over-priced outlier to one of the very cheapest and best S&P 500 passive funds available.
Elsewhere, db X-trackers has trimmed fees on a string of ETFs, including the MSCI Japan ETF (XMJD), which has dropped its ongoing charge from 0.5% to 0.3%. Previously rated Bronze, this ETF had been penalised as one of the most expensive funds tracking the MSCI Japan index. Following the move, which we expect to boost future returns, we have upgraded the fund from a Bronze to a Silver rating.
The news of these upgrades will not come as a surprise to those familiar with Morningstar as a vocal critic of high fees. In numerous studies, we have identified management fees as the best predictor of future fund performance, therefore it is logical that fees play a pivotal role in our analyst ratings methodology. In the highly commoditised and fiercely competitive passive fund market, this role is only further emphasised. Even fee cuts which would be considered as small in the active world, can cause an index tracker to stand-out from its passive peers.
Not All Improvements Merit Upgrade
This said, not all price changes will result in ratings change. For instance, as part of their recent cuts, iShares also halved the fees on the EURO STOXX 50 EUR Dist ETF (EUE) to 0.16%. Although this fee cut has improved the competitiveness of this fund relative to peers, we still think that the Euro Stoxx 50 strategy does not represent a strong investment proposition and the fund will retain its Neutral rating.
Similarly, db x-trackers reduced fees on the db x-trackers MSCI Emerging Markets ETF (XMMD) from 0.65% to 0.49%. While any such move should be applauded, in this case, the cut still leaves the fund charging more than double that of directly comparable rivals such as the Amundi MSCI Emerging Markets ETF [AMEM]. For this reason, the fund retains its Neutral rating.
One strength of our holistic approach to rating is that it allows us to absorb new information, determine materiality versus the investment universe and reassign or reaffirm ratings on a case-by-case basis.
