ETF Fee Wars Rage On

July 24, 2019

Fee Gap Business Model

For many ETF asset managers, this fee gap is a key part of the business model. They hope to attract clients to a brand by offering cheap, plain vanilla funds and then upsell more complex, pricier products.

For example, BlackRock offers both “Core” and “Edge” product suites. Core funds offer plain vanilla exposure, while Edge funds use factor-based strategies.

BlackRock prices Edge products two to five times higher than Core. The table below shows the current price difference between Edge and Core funds in the same market segment.

 

Cost Comparison Between BlackRock iShares Core & Edge Funds

Source: FactSet

 

On the surface, 2019 year-to-date flows suggest the upselling strategy is working. However, a deeper dive reveals that investors are demanding ever-cheaper products across the board, sending flows to the cheapest funds within a strategy.

The fee wars may soon level the playing field across strategies and complexity levels.

Factor Fund Fees March Toward Zero

We see the trend toward lower fees in flows activity within factor strategies, ESG and even actively managed bond ETFs.

So far in 2019, investors pulled $447 million from the iShares S&P 500 Growth (IVW) and $1.39 billion from the iShares S&P 500 Value ETF (IVE)—each of which costs 0.18%—while investing $1.58 billion in the SPDR Portfolio S&P 500 Growth ETF (SPYG) and $1.97 billion in the Vanguard Value ETF (VTV), which both cost just 0.04%.

The same preference for cheapness showed up in low-volatility funds. In this case, both USMV and its competitor, the Invesco S&P 500 Low Volatility ETF (SPLV), attracted flows, but the lion’s share went to the cheaper product. USMV, with fees of 0.15%, brought in $5.9 billion, while SPLV, with a 0.25% price tag, netted $2.0 billion. Granted, investors may also prefer USMV’s wider market-cap spectrum and its focus on minimizing portfolio volatility in comparison to SPLV’s large cap, single-stock volatility approach, but it’s hard to ignore the 0.10% price differential.

Multifactor funds don’t have as dramatic an example as growth value and low volatility, but still show a migration to low cost funds. Thirty-five of the 160 U.S. large cap ETFs take a multifactor approach to portfolio construction. On average, the 35 funds that gained market share in the first half of 2019 cost 0.15% per year less than those that lost market share.

ESG Interest Is Up, Fees Are Down

Recent ESG ETF launches offer an even more dramatic example of fee compression in action. Of the $3.9 billion that flowed to ESG-oriented ETFs in the first half of 2019, $2.5 billion went to two newly launched bespoke funds, one from BlackRock and one from DWS, both priced at 0.10% per year. The launches undercut the Vanguard ESG U.S. Stock ETF (ESGV), which now looks expensive, at 0.12%.

One of the new ESG funds, Deutsche Bank’s Xtrackers MSCI USA ESG Leaders Equity ETF (USSG), could have captured assets from the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST), which costs 0.20% per year.

JUST lost $102 million on March 8, 2019; that same day, USSG saw its first inflow of $843 million.

 

For a larger view, please click on the image above.

 

For a larger view, please click on the image above.

 

The $102 million that flowed out of JUST may have belonged to Ilmarinen, the Finnish pension fund that worked with DWS to launch USSG. Thanks to the Finns, U.S. investors now have little reason to pay more than 0.10% for a broad-based U.S. ESG ETF.

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