ETF Fee Wars Rage On

July 24, 2019

Fee War Is Everywhere

Strategy-within-a-segment cost analysis reveals the same pressures we see in value, growth, low volatility and ESG funds at work across a multitude of equity ETF investment strategy types. The table below shows the aggregate annual cost gap between ETF market share gainers and losers within a segment and strategy for competitive strategies with combined assets under management of $1 billion or greater.

 

Annual Cost Gap Between ETF Gainers & Losers By Strategy

Source: FactSet

 

Fixed Income ETFs Jump Into Fray

The price war is also heating up among fixed-income ETFs at both ends of the complexity spectrum. Vanilla funds are duking it out over a handful of basis points, while J.P. Morgan has made dramatic moves in actively managed cash management ETF pricing.

Like the equity table above, the table below shows the average cost difference by market segment for U.S. fixed income ETFs that gained and lost market share during the first half of 2019.

 

Annual Cost Gap Between Fixed Income ETF Gainers & Losers By Market Segment

Source: FactSet

 

J.P. Morgan’s most successful bond fund—the JPMorgan Ultra-Short Income ETF (JPST)—is rapidly overtaking the longtime incumbent PIMCO Enhanced Short Maturity Active ETF (MINT). JPST costs 0.18%, or half of MINT’s 0.35%.

From inception through June 30, 2019, JPST outperformed MINT by 0.22% per year, with all but 0.04% of the difference explained by cost.

From JPST’s launch through the end of 2018, MINT and JPST split most of the flows into cashlike ETFs. JPST gained market share at MINT’s expense, but both funds grew. This year, JPST captured $2.27 billion of inflows, while MINT suffered $275 million of outflows. MINT’s AUM flatlined while JPST’s climbed.

 

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

 

JPST is hardly an outlier. 2019’s fee wars have reached every asset class and strategy. While some strategy/segment combinations still command a price premium, the direction is clear.

Every basis point of cost savings is a benefit for consumers, but threatens asset managers’ revenues. Today’s loss-leader strategy cannot generate a profit if margins collapse to zero across product types.

What will the business model look like if/when investor preference pushes fees for funds like USMV and JPST down to 0.10% or 0.05%?

At the time of writing, the author held no positions in the securities mentioned. Elisabeth Kashner is director of ETF research and analytics for FactSet. Check out Elisabeth Kashner’s new e-book, “Uncover The Key To ETF Tax Efficiency.”

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