Vanguard poised to shake up ETF market

PUBLISHED : Tuesday, 07 May, 2013, 12:00am
UPDATED : Tuesday, 07 May, 2013, 3:29pm

Vanguard is expanding into Hong Kong's retail market through exchange-traded fund offerings, in a move that could trigger a fee war in the city's fund market as the world's cheapest ETF provider comes to town.

The largest mutual fund company - known for its low-fee strategy when entering new markets - officially enters Hong Kong next Wednesday by listing here its first ETF product, which will track the FTSE Asia Pacific ex Japan Index.

The total expense ratio - a measure of the total costs associated with managing and operating an investment fund - for the new product is 0.38 per cent, according to its prospectus released yesterday. That compares with 0.58 per cent for similar products offered by its major competitor BlackRock's iShares, launched four years ago.

Despite the lower cost, the firm is expecting to further cut the cost ratio as the Asian market grows, bringing it to the level of its ETF offerings in the US.

"There is no reason why Asia can't be larger than that of the US (in terms of assets under management) one day," said Shelly Painter, regional managing director for Asia at Vanguard.

"We feel great about the Asia market and its ability to grow. Low expense ratio is what makes us different … when we lower the expense ratio, even by a penny, we celebrate that."

Thanks to its low-cost approach, Vanguard in the past four years has doubled its global market share in ETFs, becoming the third-largest player, after iShares and SPDR, owned by State Street.

"It's just a difference in terms of investment philosophy, making sure the clients get the absolute lowest price possible for the best-quality product," Painter said.

Morningstar ETF strategist Jackie Choy said the fee level and the nature of the tracking index would be the key factors for Vanguard to succeed in this market. "Those who will offer lower fees will be the winner," he said.

Vanguard is also looking at mutual funds and Mandatory Provident Fund products in its retail rush. "Eventually, we would like to participate in MPF and to be a mutual fund provider [in Asia]," Painter said.