Costs of retail investment products continue slow decline
Apr 26, 2023 12:17:46 PM
Update
EU financial markets regulator the European Securities and Markets Authority (ESMA) recently published its fifth annual report on the cost and performance of EU retail investment products. Looking at the market between 2012 and 2021, it found the cost of investing in the most important retail financial products continued to decline, albeit very slowly.
The report’s key findings included the following:
- Costs have declined somewhat, but investors should still consider fund fees carefully in their investment decisions. Active UCITS remained more expensive than passive funds and ETFs. Costs were higher for cross-border funds than for domestic funds, mainly due to differences in distribution channels
- Investors paid around €3,000 in costs for an investment of €10,000 over the ten years between 2012 and 2021, leading to a final net value of €18,500 at the end of this period. Beyond performance and costs, there is increasing attention on the overall utility investors derive from investment products (i.e. value-for-money). Cost efficiency, as well as product design and quality, determines final investor outcomes
- After more than a decade of low inflation, rising prices have begun to weigh on investor returns. In addition to the average €3,000 fund fees paid for a ten-year €10,000 investment, investors typically lose €2,000 due to inflation, reducing the net value of their investment to €16,500. Inflation differences across EU member states, measured at the level of the fund domicile, add to persistent significant differences in fund costs
- While equity, bond and mixed ESG funds outperformed their non-ESG equivalents on average in 2021, results differed across asset classes. In 2021, equity and mixed ESG funds outperformed their non-ESG peers, but ESG bond funds underperformed non-ESG bond funds. ESG funds remained cheaper than their non-ESG peers, with the exception of equity ESG ETFs, which are more expensive than non-ESG equity ETFs
- Total costs for structured retail products were largely attributable to entry costs, and varied substantially by country and by pay-off type. Costs of products issued in 2021 increased, compared to products issued in the previous three years, for a majority of pay-off types and issuers.