While nothing has been decided, the deal may see Lyxor’s super-cheap ETFs close down, argues Tom Bailey.
Last week, it was announced that Amundi would buy the Lyxor ETF brand from Societe Generale for $980 million (£712 million).
The decision to buy is part of a trend towards consolidation within the ETF industry. The purchase would catapult Amundi into the position of being the second-largest ETF provider in Europe, giving it command of almost 14% of the European ETF market. However, that will still put Amundi way behind BlackRock, the largest ETF provider in Europe, accounting for around 40% of the European ETF market.
But what does this mean for investors? For now, not very much. The completion of the deal is not expected until February 2022 and which, if any, Lyxor ETFs will be closed or merged is yet to be decided. However, in my view, one potential change to keep an eye on is the fate of the very cheap US and UK market ETFs that Lyxor offers.
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The two absolute cheapest ETFs listed on the London Stock Exchange are both from Lyxor: the Lyxor Core Morningstar UK ETF (LSE:LCUK) and the Lyxor Core Morningstar US ETF (LSE:LCUD). These two ETFs charge just 0.04%. The pricing strategy from Lyxor was clearly to try and undercut other ETFs from more popular ETF providers such as BlackRock and Vanguard.
The problem, however, is that these rock-bottom prices have failed to attract many investors. The Lyxor Core Morningstar UK ETF has £108 million in assets under management. That’s way below the other ETFs offering access to the UK market. For example, the iShares Core FTSE 100 ETF (LSE:ISF) has around £8 billion in assets while the Vanguard FTSE 100 ETF (LSE:VUKE) has over £3 billion in assets. Even the less popular HSBC FTSE 100 ETF (LSE:HUKX) is roughly four times as large as the Lyxor UK ETF, with almost £400 million in assets.
The FTSE 100 is, of course, a different index to the one the Lyxor ETF tracks. However, whereas the FTSE 100 is the largest 100 companies listed in the UK, the Morningstar index has more than 300 constituents, giving it both large- and mid-cap exposure.
But the two indices are not that different in practice. Both indices have similar top 10 weightings, and the sheer size of the largest holdings in the Morningstar index crowd out its additional smaller holdings. In 2020, the two indices provided roughly the same performance, both losing just over 11%.
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Lyxor Core Morningstar US is even smaller, with just £40 million in assets under management. In comparison, the Invesco MSCI USA ETF (LSE:MXUS) has around £1.8 billion in assets, while the iShares Core S&P 500 ETF (LSE:IUSA) has around £8 billion. Again, these two ETFs offer exposure to different indices to the Lyxor US ETF. However, when judged in terms of being an ETF that provides broad US equity exposure, Lyxor is comparatively tiny.
So, this raises the question of whether Amundi will keep these two ETFs going after the deal is completed. Running such small ETFs with such low charges is likely not very profitable. It is feasible that Amundi will decide to close these ETFs and roll the assets into their own UK or US-focused ETFs. Whether they will decide to cut the fee to the 0.04% that the Lyxor ETFs charges is uncertain.
ETF investors in the UK could end up losing the two cheapest ETFs currently available. Of course, judging by the size of the ETFs, investors were not particularly interested in these products anyway, regardless of the low fees. If the goal was to attract assets by undercutting the much more popular ETFs from Vanguard, iShares, HSBC and Invesco, it failed.
It should also be noted that while these two ETFs are the cheapest at 0.04%, all of the above ETFs mentioned offer very low and competitive fees. The iShares Core FTSE 100 ETF and HSBC FTSE 100 UCITS ETF, for example, charge just 0.05%. Likewise, Invesco MSCI USA ETF (LSE:MXUS) charges 0.05%, while the iShares Core S&P 500 ETF charges 0.07%. For many investors, paying a couple more basis points is worth it to access a larger ETF tracking bigger name indices.
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