A flat U.S. stock market and losses in the U.S. bond and most international markets mask what has been another impressive year for ETF inflows of approximately $280 billion as of mid-December. Such a cash haul would be the third-straight year of greater-than-$250 billion net inflows even as investors have further pared exposure to mutual funds.
But as 2018 fades in the rearview mirror, it’s time to predict what will happen in 2019 …
The first zero-expense-ratio ETF will launch in 2019, according to CFRA.
There are now 11 U.S.-listed ETFs that charge a miniscule 0.04% net expense ratio, and five charging an even tinier 0.03%. The battle to earn investor attention as the preferred low-cost provider involves the five largest firms—iShares, Vanguard, SSGA, Invesco and Schwab.
While it’s hard to make money when charging $3 or $4 to manage a $10,000 investment often including index licensing, these firms have hoped to make it up in volume, securities lending and being an anchor in an investor’s asset allocation strategy surrounded by less-discounted products.
To some extent, it’s working, as these 16 ETFs gathered $62 billion of net inflows year-to-date through Dec. 13, nearly a quarter of all ETF inflows in a year dominated by iShares, Vanguard and Schwab.
|Fund||Fund Family||Expense Ratio (%)||YTD Flows ($M)|
|iShares Core S&P Total U.S. Stock Market ETF (ITOT)||iShares||0.03||3,405|
|Schwab U.S. Large-Cap ETF (SCHX)||Schwab||0.03||2,990|
|Schwab U.S. Broad Market ETF (SCHB)||Schwab||0.03||1,440|
|SPDR Portfolio Total Stock Market ETF (SPTM)||SSGA||0.03||1,643|
|SPDR Portfolio Large Cap ETF (SPLG)||SSGA||0.03||1,236|
|iShares Core S&P 500 ETF (IVV)||iShares||0.04||15,038|
|Vanguard S&P 500 ETF (VOO)||Vanguard||0.04||16,566|
|Vanguard Total Stock Market ETF (VTI)||Vanguard||0.04||8,306|
|Schwab U.S. Large-Cap Growth ETF (SCHG)||Schwab||0.04||916|
|iShares Core S&P U.S. Growth ETF (IUSG)||iShares||0.04||1,917|
|iShares Core S&P U.S. Value ETF (IUSV)||iShares||0.04||1,813|
|Schwab U.S. Large-Cap Value ETF (SCHV)||Schwab||0.04||842|
|SPDR Portfolio S&P 500 Growth ETF (SPYG)||SSGA||0.04||2,265|
|SPDR Portfolio Developed World ex-US ETF (SPDW)||SSGA||0.04||1,701|
|SPDR Portfolio S&P 500 Value ETF (SPYV)||SSGA||0.04||2,122|
|Invesco PureBeta MSCI U.S.A. ETF (PBUS)||Invesco||0.04||0|
Source: ETF.com, as of 12/14/2018
However, the Invesco PureBeta MSCI U.S.A. ETF (PBUS) is the poster child for what happens when an asset allocation ETF launches but doesn’t stand out from its peers on cost. PBUS launched in September 2017, and still has only less than $3 million in assets, despite its 0.04% net expense ratio. In the past year, PBUS has outperformed the Schwab U.S. Large-Cap ETF (SCHX) by approximately 300 basis points as of mid-December. SCHX has a slightly lower fee of 0.03%.
While PBUS has been ignored, SCHX added approximately $3 billion of new money this year and has $14 billion under management. Perhaps being first to reach zero could jump-start Invesco’s flows. Despite the scale benefits of recent acquisitions, Invesco is a distant fourth in market share.
Meanwhile, J.P. Morgan (JPM) is preparing to launch a market-cap-weighted U.S. equity ETF in 2019, based on regulatory filings. The issuer’s U.S. equity presence has focused on factor investing, but in 2018, the asset manager gathered $1 billion or more in three cap-weighted international equity ETFs invested in Canada, Europe and Japan. And last week, JPM launched the actively managed JPMorgan US Aggregate Bond ETF (JAGG), a factor-focused core bond fund at an aggressively priced 0.07% expense ratio.
The JPMorgan BetaBuilders US Equity ETF filing is awaiting review from the SEC, and doesn’t yet include an expense ratio. We think the attention and asset flows that would come with the first zero-fee ETF could help to further catapult J.P. Morgan—now just outside of the top-10—into the top five ETF asset managers and knock an incumbent back.
|Family||YTD 2018 Net Flows ($M)|
Source: ETF.com, as of 11/30/2018
Both iShares and Vanguard repeatedly dispute the likelihood of a zero-fee ETF. Executives point out that, while Fidelity launched four zero-fee index mutual funds in 2018, only Fidelity’s own brokerage clients can purchase them.
This limited the target audience, and has enabled other products and services to be promoted in tandem. However, ETFs from any provider can be purchased on all brokerage platforms.
Barely Make A Dent
Yet the vast majority of shares of Schwab’s suite of ETFs are held by the brokerages firm’s own clients. CFRA thinks the removal of the fee from SCHX or the 0.03% fee the Schwab U.S. Broad Market ETF (SCHB) would barely make a dent in the projected $10 billion-plus annual revenue stream for Charles Schwab (SCHW). Rather, the firm could benefit from increased asset growth and trading volumes.
Other deep-pocketed firms that have aggressively competed on price in recent years could similarly break the glass and reach zero. SSGA slashed the expense ratio of the SPDR Portfolio Total Stock Market ETF (SPTM) to 3 basis points in late 2017, and gathered $1.6 billion in new money this year.
While substantial, the inflow is still less than SCHX or the similarly priced iShares Core S&P Total U.S. Stock Market ETF (ITOT), which gathered $3.4 billion. A zero-fee ETF could help SSGA offset overall recent market share losses to iShares and Vanguard.
CFRA doesn’t think investors should choose a current or a future fund based on just an eye-catching or even zero-expense ratio from J.P. Morgan, Invesco, SSGA or Schwab. But we think it’s inevitable that, given investors’ laser focus on fees, one or more firms will decide they can eat the few basis points of costs to run an ETF in exchange for being first to reach zero. Such a move would certainly shake up the rapidly growing ETF industry and possibly drive further industry inflows.
At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him on Twitter @ToddCFRA.