Price wars, newcomers heat up international ETF market

Price wars and competition have come to international ETFs.

ETFs investing exclusively outside the U.S. have drawn $50 billion of net inflows since the end of the third quarter of 2022, including $20 billion in January alone, according to FactSet Research Systems Inc. And while market leaders Vanguard Group and BlackRock Inc. maintain nine of the 10-largest international equity ETFs, the industry stalwarts are finally facing some competition.

Issuers such as Dimensional Fund Advisors L.P., American Century Investments Inc., and JP Morgan Asset Management Inc., are winning clients through a combination of brand, reputation, and business model. Price and performance are a prerequisite in the hyper-competitive ETF market.

"The international equity ETF market has become crowded," said Elisabeth Kashner, vice president and director of global fund analytics with FactSet, "but ETF newcomers DFA and Avantis Investors from American Century have captured investors' attention by offering actively managed core exposure at a competitive price point."

Since the end of the third quarter, DFA's 13 non-U.S. equity ETFs have added $5.2 billion in net inflows to close January at $22.7 billion in total assets, according to data provided by FactSet. DFA entered the ETF market in late 2020 and has added to its equity and fixed-income offerings through a combination of new launches and mutual fund conversions. Two of its seven mutual fund to ETF conversions invest outside the U.S. — the $5.4 billion World ex-US Core Equity 2 ETF and the $4.9 billion International Value ETF.

"Our investing track record means a lot," said Karen Umland, senior investment director and vice president for DFA in Santa Monica, Calif. "But when it comes to international and emerging markets, clients still want to know about the portfolios and processes — including the factors driving returns and how we are navigating macroeconomic events and geopolitics within the portfolio."

DFA's actively managed international ETFs are also price competitive, with net expense ratios of between 0.18% and 0.43%. Avantis Investors, with former DFA co-CEO and CIO Eduardo Repetto serving as CIO, markets its international offerings with net expense ratios from 0.23% to 0.36%.

DFA (and Avantis) ETFs are priced similar to DFA's active mutual funds, which themselves are well below the 0.6% asset-weighted average expense ratio for world equity funds, according to a 2022 Investment Company Institute report.

Comparatively, the asset weighted average expense ratio for indexed world equity ETFs was 0.24% and for all active equity ETFs it was 0.48%.

Avantis, which didn't have the benefit of conversions to goose its total assets, has added $2.3 billion in net flows to its $8.2 billion in total non-U.S. equity ETFs since the end of the third quarter, FactSet said.

Another recent market entrant, Capital Group, attracted $432 million in net inflows since Sept. 30 to its actively managed $1 billion International Focus Equity ETF with an expense ratio of 54 basis points.

Of course, flow augury has limitations.

Sometimes major moves into a particular ETF are the result of an allocation by one or two strategists. For example, headlines about an international triumph in January are skewed by a $3.6 billion move into the $7 billion J.P. Morgan BetaBuilders Europe ETF, the top asset gatherer in the U.S. ETF market in January.

"We have seen roughly $4.7 billion of inflows across our entire BetaBuilder range," said Kristen Chambers, managing director and global head of media relations for JP Morgan Asset Management in New York. "This has been the result of a number of ETF model clients tactically shifting back into equities."

Newcomers aside, ETF investors are still flocking to broad-based passive international products from the market leaders.

"October was an inflection point," said Kristy Akullian, director and senior iShares strategist at BlackRock in San Francisco. "Dollar strength looked to have peaked and emerging market central banks were quicker to move than in the U.S. and other developed markets," she said.

BlackRock offers 118 equity ETFs investing outside the U.S.— led by the $96 billion iShares Core MSCI EAFE ETF and the $72 billion iShares Core MSCI Emerging Markets ETF. Collectively, those 118 products added $16 billion in net flows since September to close January with $483 billion in assets under management, according to FactSet.

"It's still the early innings for international after a long run of underperformance."

Over the last 10 years, the MSCI EAFE index was up an annualized 2.21% and the MSCI Emerging Markets index was down an annualized -0.47%, according to MSCI data through Feb. 6. In contrast, the MSCI USA index was up an annualized 10.46%.

Vanguard, which offers a more limited international ETF suite, brought in $11.5 billion since September across 11 products to reach $323 billion in assets at the end of January, according to FactSet.

While the asset gap between the established products and the newcomers is wide, the ability to transact smoothly in the smaller international ETFs is not affected. Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital LLC in Jersey City, N.J., said that most of the products from DFA and Avantis, for example, "have strong block liquidity if you need to source larger trades."

The largest emerging markets ETFs trade between 13 and 16 million shares per day with spreads around 0.02%, while the $26.6 billion iShares MSCI Emerging Markets ETF trades more than 40 million shares per day, FactSet said. By comparison, DFA's largest emerging market ETF, the $2.2 billion Dimensional Emerging Equity Core Market ETF, trades less than 1 million shares per day with a 0.05% average spread.

Mr. Bajaj and BlackRock's Ms. Akullian said they recently observed emerging market investors more carefully considering their China exposure. They are expressing a view by using China ETFs in tandem with emerging market ex-China ETFs to overweight or underweight the country relative to the index.