What Fee War?
In 2018, we continued to see costs drop across the investment industry; Fidelity even launched its own zero-fee mutual funds in the fall. But apparently nobody told the ETF class of 2018 to keep it cheap. The average expense ratio launched by a new issuer in 2018 was 0.59%, or 56 basis points more expensive than the least expensive equity ETFs.
In part, that high cost is likely because the methodology underpinning these ETFs is so complicated. It’s one thing to offer a passive, S&P 500 ETF for 0.03%. But an ETF like MSUS, an AI-driven ETF that offers anywhere from 0% to 160% long exposure on the market, will inherently have higher turnover, and in turn, higher costs.
Still, even as most ETFs launched by newcomers carried high price tags, some issuers tried to constrain costs. PGIM, for example, launched the market’s cheapest actively managed ultra-short-term bond ETF, PULS. Meanwhile, the American Century Diversified Municipal Bond ETF (TAXF) matched the cost of the cheapest active, broad market muni ETF on the market, the Hartford Municipal Opportunities ETF (HMOP).
Still Room For Surprises
You’d think after 25 years we might have seen it all in the ETF space, but 2018 offered a few eye-poppers.
That includes Impact Shares, the industry’s first nonprofit ETF issuer. In 2018, Impact Shares debuted three unique ESG ETFs, of which, 100% of the proceeds will go to support the associated charities and causes, including gender diversity, racial equality and sustainable development.
We also saw the launch of an unusual energy equity ETF from billionaire and noted renewable energy advocate T. Boone Pickens via issuer TriLine Index Solutions. But the NYSE Pickens Oil Response ETF (BOON) has nothing to do with clean power; instead, the ETF tracks companies that have exhibited a high correlation to the price of Brent crude oil over the past five years.
That puts BOON in the unique position of being an energy equity ETF that has less than half its portfolio in energy companies; industrials, basic materials and consumer cyclicals all make up substantial portions of the portfolio too.
So what does the future hold? We can’t know, of course. But we can be confident there’s still room for surprises—and new superstars—ahead.