Fee Wars Will Continue
For the most part, 2015 was a quiet year in terms of fee wars among ETF issuers; that is, until iShares cut fees on seven of its “Core” ETFs in mid-November, some by more than half.
The move was so aggressive—not to say, unexpected—it landed the iShares Core S&P Total Stock Market ETF (ITOT | A-100) in the top spot as the cheapest equity ETF in the U.S. After the fee cut, ITOT cost a mere 0.03% in expense ratio, undercutting all competitors.
What followed was equally exciting: Charles Schwab vowed it would not be undercut, and within days, it too lowered fees on some of its ETFs. Most notably, Schwab matched ITOT’s low price tag by bringing the expense ratio on the competing Schwab U.S. Broad Market (SCHB | A-100) down 1 basis point to 0.03%.
One Direction For Fees
It’s official: The race to the bottom is reignited.
“I think the fee war only goes one direction: down,” said Dave Nadig, director of ETFs for FactSet. “iShares’ move was a declaration of war, and it will spill out from the ‘Core’ products to anything that’s hot.”
In other words, we’ll start to see fee cuts “spill out” beyond plain-vanilla strategies to popular strategies and segments—those that are typically known to cost more, such as smart beta.
In fact, this trend is already budding thanks to Goldman Sachs. The firm, which entered the ETF market for the first time in 2015, with the launch of a lineup of smart-beta ETFs, showed that it was coming into the market to grow assets, and it was going to do that by offering competitive pricing.
Goldman Sachs’ ActiveBeta U.S. Large Cap Equity ETF (GSLC), tracking an index of U.S. large-cap stocks comprising four factor subindexes, came to market at 0.09% in fees. Consider that price tag in the context of other smart-beta funds, which average upward of 0.50% in expense ratio—more than five times the cost. Goldman Sachs is basically offering smart-beta ETFs for the price of plain-vanilla funds.
“While we’ve seen huge product proliferation, we haven’t had huge asset flows to a broad group of them,” Nadig noted. “So, how will newer entrants compete? Price.”
There’s no question that lower fees mean fewer dollars flowing into ETF issuers’ coffers yearly. The idea is that competitive pricing will help grow the asset base, offsetting losses incurred by slashing expense ratios.
“Fee compression and asset growth will always be a push-me/pull-you,” Nadig added. “But I stand by my prediction that, in the next 10 years, ETF assets cross mutual fund assets.”
