ETF Fee War Reignites

June 29, 2017

Within the past 48 hours, two midtier ETF issuers have launched what appears to be a new phase of fee compression in ETFs—specifically, smart-beta ETFs.

Today Guggenheim announced it would literally halve the cost of its largest fund, the $13 billion Guggenheim S&P 500 Equal Weight ETF (RSP), from 0.40% to 0.20%. And shortly before that, WisdomTree slashed the fees on four of its alternatively weighted emerging market ETFs by nearly 50%. Both sets of changes will be effective June 30.

RSP Fees Halved
The move by Guggenheim is particularly breathtaking—RSP is its largest ETF, by a magnitude of nearly seven. Bloomberg ETF Analyst Eric Balchunas estimates the firm has given up $27 million a year, or somewhere near a third of its profits.

“It’s painful for them, but it’s smart,” Balchunas said of Guggenheim’s move.

It’s an act that could be termed “preservation through cannibalization.” After all, Goldman Sachs filed back in April for its own U.S. large-cap equal-weighted ETF that would compete directly with RSP. Although the Goldman filing has not been updated with an expense ratio, Goldman has proven it has no compunction about coming out of the gate with aggressive pricing.

“In essence, one of [Goldman’s] moves is to be the Vanguard of smart beta. Guggenheim saw that filing, I’m sure, and said, ‘It’s a jungle out here, but you’re not going to eat us—we’re going to eat ourselves first,” Balchunas said, citing a quote by Steve Jobs that you can’t be cannibalized if you cannibalize yourself first.

The ETF Jungle

“I’ve never seen that massive a cut. They just basically killed Goldman’s entire point for launching that product in one shot,” he added. “This is life in the ETF jungle. This is how you have to live to survive.”

When Goldman launched its large-cap smart-beta ETF, the flagship of its ActiveBeta family, the fund had an expense ratio that was equal to that of SPY. The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) comes with an expense ratio of just 0.09%.

With RSP representing so much of Guggenheim’s assets, the firm apparently decided to put a decisive moat around its most popular fund, with an aggressive price cut.

Balchunas points out that Goldman’s pricing practices were expected to be the main appeal of its proposed equal-weight fund.

 

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