BlackRock fee cut portends new Hong Kong ETF price skirmish

BlackRock’s decision to slash fees on its flagship China A-share exchange-traded fund in Hong Kong, suggests the market is becoming more competitive and could spark a price war, some industry participants say.

BlackRock announced last month that the management fee on its Hong Kong-listed iShares FTSE A50 China ETF would be reduced by more than half to 0.35 per cent from 0.99 per cent per annum, effective on March 22.

Launched in 2004, the iShares A50 ETF has long been BlackRock’s largest ETF offering in the territory, providing China A-share exposure to both retail and institutional investors.

The ETF, which changed its base currency from Hong Kong dollars to renminbi in 2018, has just over $2bn in assets, but it saw outflows of more than $1bn last year. The outflows were the latest blow for the fund, which has fallen from a height of more than $14bn in assets as of end of 2014. The fund has since been swept up in a general exodus as investors have pulled money out of all large FTSE A50 China ETFs in the territory.

One Hong Kong-based senior executive, who works for a different ETF provider in the territory, told Ignites Asia that the iShares FTSE A50 China ETF fee cut could lead to similar price reductions at its competitors if it proved attractive and encouraged investors to switch into the cheaper ETF.

He added that some Hong Kong issuers were already moving to lower the price of their China A-share ETFs to stay competitive and there were signs of a looming fee war in the territory’s China-investing ETF market.

Jackie Choy, Hong Kong-based director of ETF research at Morningstar, said the iShares FTSE A50 China ETF fee reduction was a “big cut”, which had placed the ETF’s fees at “the lower end of the China A-share ETF market”.

The ongoing charges figure (OCF), a widely used metric to express the overall costs of funds including management fees, for the iShares A50 ETF is currently at 0.49 per cent, according to Hong Kong stock exchange data, which are updated every six months.

By comparison, CSOP Asset Management’s CSOP FTSE China A50 ETF, which has also been leaching assets but is the main rival to the iShares ETF, currently has HK$11.65bn ($1.5bn) in assets and an OCF of 1.18 per cent.

A person close to BlackRock told Ignites Asia that the company had received positive feedback from institutional clients regarding the ETF’s more competitive price point.

Institutional investors constitute the main client base for the ETF, the person explained.

Morningstar’s Choy said long-term investors might consider switching out of the more expensive vehicle for the cheaper ETF. However, retail investors and other short-term clients might not see the price gap as a significant factor, he added.

The senior ETF executive said that CSOP’s A50 ETF would be under intense pressure after the iShares fee cut.

He said the drastic fee reduction showed that BlackRock knew the iShares A50 ETF was the company’s most competitive ETF in Hong Kong and this was a move to protect its market share amid intensifying competition. The US manager also appears to be aligning the pricing across its Hong Kong-listed ETFs, as previously the A50 product was among its more expensive products in the territory.

“In order to attract inflows, iShares has started with its largest China ETF, which is A50, and upped its competition with CSOP’s A50 product, as it might not win in the battle within the CSI 300 space,” the executive said.

In recent months, China Asset Management Hong Kong’s ChinaAMC CSI 300 ETF, which was launched in 2012, ballooned to HK$17.75bn in assets and replaced the iShares A50 product to become Hong Kong’s largest China A-shares ETF.

E Fund Management Hong Kong, the subsidiary of China’s largest mutual fund company excluding money fund assets, slashed fees on its CSI 300 ETF — the company’s only Hong Kong-listed ETF — from 0.76 per cent to just 0.1 per cent in February.

However, the ETF’s OCF, which takes into consideration all additional charges imposed on investors, stands at a staggering 3.61 per cent and assets under management have shrunk to HK$34m, according to data from the exchange.

BlackRock’s direct competitor in the A50 battlefield, however, dismissed any notion that a fee cut would induce investors to move to the cheaper version and said it did not want to engage in a fee war.

CSOP AM had not received any enquiries about the difference in fees from sizeable investors so far and “has no plan to lower the fees” of its A50 ETF, the company said.

But this would not be the first time that a mini ETF price war has broken out in Hong Kong.

After BlackRock listed its six lowest-cost, physically replicated ETFs in Hong Kong in 2016, low-cost rival Vanguard decided to cut fees on all five of its Hong Kong ETFs to only 0.18 per cent.

The moves did not help Vanguard build scale. The US passive giant has announced it will shutter its ETF range in the territory next month.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.