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iShares Makes New Active ETFs Dirt Cheap

By
Dennis Hudachek
April 25, 2013
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Will the low-low expense ratios on iShares’ new active equity funds be enough to generate buzz?

iShares made quite a splash last week after launching its first actively managed equity ETFs. But what made my jaw drop wasn’t iShares’ moving more deeply into the active space, but the low costs of the two funds.

It’s long been accepted that investors wanting active management pay higher fees for the research and stock selection provided by “expert” fund managers.

In the mutual fund space, investors often pay hundreds of basis points for this. Even in the ETF space, active funds often charge close to or higher than 1 percent a year in fees.

In comparison, the iShares Enhanced US Large-Cap ETF (NYSEArca: IELG) and the iShares Enhanced US Small-Cap ETF (NYSEArca: IESM) provide investors with access to BlackRock’s active equity research capabilities in an ETF wrapper for only 18 and 35 basis points, respectively.

Just to put into context how incredibly cheap that is, of the 61 active ETFs across all asset classes currently in existence, the average expense ratio is 1.07 percent. The most expensive active fund is currently the AdvisorShares Accuvest Global Long Short ETF (NYSEArca: AGLS), with a net expense ratio of 5.86 percent, or $586 for each $10,000 invested.

That’s sky-high, but even the iShares Diversified Alternatives Trust (NYSEArca: ALT), an active multi-asset-class ETF that has been around for more than three years, comes in at a still-high 0.95 percent a year.

So, IELG’s 18 basis points is now not only the cheapest active equity fund, it’s also the cheapest of all active ETFs, including fixed-income funds. IESM’s 35 basis points, meanwhile, is the fourth-cheapest, only behind IELG and a few fixed-income ETFs. Even within iShares’ suite of 288 index-tracking ETFs, the average expense ratio is 0.41 percent. This puts the two new active funds well below that level.

It’s worth pointing out that simply because an ETF is cheap doesn’t necessarily make it a steal. Historically, most active funds have underperformed the broad market.

I think it’s fair to say that most investors would prefer to pay more for a fund with a history of outperformance, over a cost-effective fund that significantly lags the broader market.

That said, let’s do a dive into the funds’ investment strategies.

 

ETF DAILY DATA

Massive inflows into U.S. equity funds on Monday, Dec. 22, propelled total ETF assets to a new record.

'SPY' raked in more than $12 billion Monday, Dec. 22, pacing State Street's issuer-leading inflows on the day, as total U.S.-listed ETF assets jumped to $2.005 trillion.

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