S&P’s Rosenbluth: ETF Fee War Is Good

November 08, 2012

A rising tide makes winners of all the combatants in the ETF industry’s burgeoning fee wars, S&P’s Rosenbluth says.


The widening “fee war” among ETF sponsors definitely benefits investors, Todd Rosenbluth, an ETF analyst with S&P Capital IQ, recently told IndexUniverse.com Managing Editor Olly Ludwig.

While the fee battle is emblematic of an exchange-traded fund industry that is beginning to mature, the competition among ETF sponsors should be more of a worry to mutual fund companies, Rosenbluth said. That’s because the shift to ETFs from mutual funds is in full bloom, and fund companies at the center of the ETF price battle—Vanguard, Schwab and iShares—will all discover that they’ll each garner healthy flows into their products in the coming years.


Ludwig: What is your take of what has been characterized as a fee war in the ETF space?

Rosenbluth: What we’ve seen over the last few years is that ETF asset growth is continuing, but at a slower pace. And what we think is happening, and what we expect to continue happening, is that the larger ETF providers are going to try to differentiate themselves on various factors. The expense ratio is still a key decision-making tool for investors. So, what Vanguard, iShares and Schwab are doing is trying to keep their costs as low as possible and appeal to a broader universe of ETF investors.

Ludwig: Let’s look at IVV, the iShares S&P 500 ETF (NYSEArca: IVV) vs. the Vanguard S&P 500 ETF (NYSEArca: VOO). The Vanguard fund is 5 basis points, the iShares is 7 basis points. Yes, Vanguard has bragging rights, but are a few basis points in expense ratio really significant in the grand scheme of things? If you project that over an investment lifetime, are those 2 basis points, absent all of the other cost variables, really worth fighting about?

Rosenbluth: The short answer is no. Investors may choose to go with one ETF family for all of their ETFs, or especially if they can get diversification. Vanguard gets to say they’re the cheapest, but if you’re working with iShares because you like the global equity portfolios that they have or you like the fixed-income portfolios they have, and you want S&P 500 exposure, you’re more likely, we think, to choose the iShares S&P 500 portfolio even if it is a basis point or two higher.

But as money continues to move into these ETF’s, we’re going to see the chances for ETF expenses to come down because this is, in part, a scale business.

Ludwig: When we talk about Vanguard and iShares, they’re traveling in the same traffic; more so now with the iShares launch of this “Core” product line. On the other hand, BlackRock is a publicly traded company and Vanguard is owned by its own fund holders. So Vanguard doesn’t want to acknowledge this as a fee war, but described it as a function of scale, as you were just touching upon a moment ago. What is your sense about that Vanguard claim? Is it credible?

Rosenbluth: Vanguard has always prided itself on being a low-cost provider trying to bring expense ratios down for its ETFs. Its most recent efforts to bring expenses down with a change in benchmark for many of the ETFs we’re talking about are in line with its broad mission. So I think they would be looking to bring costs down regardless of what iShares was doing.

iShares, in contrast, we think is likely responding to the fact that Vanguard has gained some market share from iShares in 2012…


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