The Bank of Japan’s efforts to support the stock market by purchasing large amounts of exchange-traded funds unfairly favours the largest financial firms and hinders price competition, according to some market observers.
The programme hurts efficient pricing for ETFs, because it was designed in a way that forced the BoJ to purchase higher volumes of funds that charge larger fees, according to Kimie Harada, a professor at Chuo University in Tokyo.
The BoJ has purchased ETFs in proportion to their size, and the bigger ones tend to be offered by giant asset managers, at higher rates.
While investors typically compare fund returns in deciding where to put their money, the performance of products that mirror index moves tend to move alike, making the fees the key variable. The BoJ plan diminishes the need for asset managers to compete on charges, the professor said. The BoJ declined to comment. The BoJ started buying ETFs in 2010, with Governor Haruhiko Kuroda later accelerating purchases as part of an unprecedented stimulus package aimed at revitalising the economy. Shingo Ide, chief equity strategist at NLI Research Institute, estimates the central bank’s accumulated ETF purchases since then reached 33.9tn yen ($315bn) as of the end of April, equal to about 90% of the country’s total ETF market.
The central bank in March doubled its annual target for purchases of ETFs that track Japan’s major stock indexes to 12tn yen as part of its effort to combat the impact of the coronavirus.
The bank has oftentimes been criticised for distorting markets through its massive purchases. Now concerns are rising on its potential to suppress financial product competition. “The BoJ says it has purchased products based on size to keep things fair,” Chuo University’s Harada said in an interview. “But that’s not really keeping things fair. As a result, this is like subsidising several large asset management companies.”
The big winners in terms of revenue generated off the BoJ purchases have been the asset management arms of the country’s top brokerages, Nomura Holdings Inc and Daiwa Securities Group Inc. Nomura’s Topix ETF, the largest of its kind, and Daiwa’s ETF-Topix both charge investors an annual trust fee of 0.11% on the total amount invested.
Among smaller players in Japan, BlackRock’s iShares Core Topix ETF carries an expense ratio of just 0.06%. But with asset managers offering reduced fees not being rewarded by the BoJ policy, competition will suffer, Harada said.
The BoJ last month announced tweaks to the programme, in an effort to minimise market distortion. It said from May, ETF purchases will be linked to the amount available on stocks on the market rather than their total value. While this may see smaller players get some more of the action it won’t change the overall picture, said NLI Research’s Ide, adding that “it’s not as if the volumes of ETFs the BoJ has already purchased will be replaced by those with cheaper fees.”
The central bank’s purchases have slowed in May as equity markets have rebounded from the Covid-19 selloff earlier this year. The Topix and the Nikkei 225 Stock Average have risen about 20% from their March lows, entering a technical bull market.
Still, the BoJ has bought a total of 4.2tn yen in ETFs so far in 2020, outpacing all previous years in the past decade. With buying power that massive, the bank should have some kind of policy based on fees, according to Ide. “If you’re a buyer that is as big as it is, the normal thing to do would be to ask for a fee reduction,” he said.
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