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Free Lunch: Will Vanguard Pay Europeans to Invest in ETFs?


The fee war in ETFs has been running hot with fund providers slashing fees and brokers rushing to offer commission-free trades.

Now a Vanguard executive reportedly says the asset manager could offer ETFs to investors in Europe with zero fees. Even better, the firm could actually pay individuals to invest in its ETFs.

It does sound farfetched. However, Nick Blake, head of retail at Vanguard Investments, in an Ignites Europe report said revenues from securities lending alone are sufficient to make ETFs profitable.

“I would like to think the cost of investing [in ETFs] could come down to zero,” Blake said in the report. “There will always be a fixed cost in there, but if [a firm’s asset] volume is big [enough], the total expense ratio can come right down.”

Speaking at a conference in London, the Vanguard executive said the company’s ETF fees can decline more due to the revenues physical ETFs can generate from securities lending.

In theory, Vanguard could even pay investors to invest in the firm, creating negative expense ratios, Blake said.

Nizam Hamid, an independent ETF consultant, in the Ignites Europe report said that revenue from securities lending can indeed help offset fees.

Yet he added there are “very few funds where you will get enough securities lending revenues” to completely offset the ETF fees. “It can happen in odd and exceptional cases, but it is quite hard to suggest it could be a strong ongoing theme,” Hamid said in the article.

In fact, regulators have been taking a closer look at ETF securities lending practices in Europe. The European Securities and Market Authority has proposed more rigorous guidelines on collateral. [European Regulators Focus on Securities Lending in ETFs]

“It’s a pipe dream,” said Ben Seager-Scott, senior research analyst at BestInvest, referring to the idea of no-fee ETFs.

“Encouraging firms to do more [securities lending] is not very wise [as] lending out more of an ETF effectively turns physically replicated ETFs into synthetic ETFs,” he said in the Ignites Europe story. “It’s a nice idea, but the reality is that people want to invest in very liquid [products], and there is not enough demand for securities lending that it would be feasible” to bring expense ratios down to zero.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.