US Zero-Fee Passive Investment Funds Viewed from a European Angle
In the world of fund management, a strategic approach known as the loss leader strategy is gaining traction, particularly in the United States and Europe. This strategy involves offering certain funds or investment products at very low fees or even at a loss to attract investors, with the ultimate goal of generating profits through other related financial services or products.
The Application of Loss Leader Strategy in the US and Europe
In the US, large fund managers and platforms like Vanguard and Fidelity have implemented this strategy by aggressively lowering fees on index and mutual funds. This move drives scale advantages, enables cross-selling of higher-margin products such as active funds and wealth management services, and puts pressure on competitors to reduce costs as well. The US market is marked by intense fee competition, largely due to the rise of passive investing.
Similar trends are visible in Europe, particularly after regulatory initiatives such as MiFID II that have increased fee transparency and lowered barriers for fund distribution. European fund houses are increasingly using low-cost ETFs or passive funds as entry points, aiming to generate customer loyalty and upsell to other products or services.
Implications for Investors
The loss leader strategy initially benefits investors by offering lower fees on flagship or loss-leading funds, potentially increasing their net returns. However, there are risks associated with this strategy. There is a possibility of a focus on scale over suitability, meaning investors might be encouraged into funds that aren't ideal for their personalized goals but serve as feeders to other offerings. There is also a risk of complexity, with investors buying "free" or cheap products without fully understanding the associated fees on other services.
Implications for Competitors
The loss leader strategy may force competitors to cut fees or adopt similar strategies to retain market share, squeezing profit margins across the industry. Smaller or niche fund managers might struggle to compete on cost, potentially leading to consolidation or loss of market diversity. Larger firms with scale advantages benefit further, reinforcing market power and prompting concerns about competitive dynamics.
In conclusion, the loss leader strategy in fund management serves as a powerful customer acquisition tool in the US and European markets, with important consequences for investor costs and industry competition. It forces a broader reduction in fees but also raises questions about long-term sustainability and market concentration.
References:
- Loss leader - Wikipedia (2025) — Describes loss leader pricing generally and its conceptual application.
- As of August 2018 in the United States, a Boston-based fund powerhouse employed a loss leader strategy with the launch of two zero-fee index tracking funds.
- Payment for investment research through soft dollar arrangements, using a portion of commission for execution costs, is now a separate charge under MiFID II.
- Some commentators have expressed concerns about transparency within zero-fee funds in the current regulatory environment in Europe.
- MiFID II requires fund managers to disclose fees more clearly to investors, both before and ongoing investments, and has transformed payment for investment research into a separate charge applied by the investment manager to investors.
- The launch of these zero-fee funds caused a significant drop in competitors' shares.
- Some regulatory changes in Europe may not necessarily favor the growth of the no-fee funds market.
- The views expressed in the article do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group.
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Active management firms in the US, such as Vanguard and Fidelity, have adopted the loss leader strategy by lowering fees on index and mutual funds, aiming to cross-sell higher-margin products like active funds and wealth management services, creating intense competition among businesses in the investing sector.
Similarly, European fund houses, like those in the EU market post-MiFID II, are utilizing low-cost ETFs or passive funds as entry points, aiming to generate customer loyalty and upsell to other products or services, thus following a similar trajectory of the loss leader strategy.
