ETF Price War Heats Up

[Editor’s Note: The following originally appeared on FactSet.com. Elisabeth Kashner is director of ETF research and analytics for FactSet.]

For investors, it’s getting easier to make money with ETFs, as issuers keep getting squeezed on costs. This is great news for ETF investors, but hard on the industry.

The October ETF story is one of price wars in headline vanilla funds and price compression in the strategies that had once promised greater pricing power (such as “smart beta” and active management). While pockets of pricing power still exist, they are largely populated by trading vehicles or one-of-a-kind funds that have no real competitors. 

The ETF price war is real and intensifying, particularly in the vanilla space. During October, we saw several major industry announcements for new or revamped cheap core funds:

• Charles Schwab launched the Schwab 1000 Index ETF (SCHK), a self-indexed fund that is nearly indistinguishable from the Russell 1000-based funds from SSGA, iShares and Vanguard. Self-indexing can create cost-savings, by eliminating index licensing fees. SCHK costs 0.05% per year.
• SSGA slashed fees on 15 of its core products, and announced that they will be dropping the Russell 1000/2000/3000 indexes in favor of self-indexing, similar to Charles Schwab’s new launch.
• Invesco PowerShares launched a suite of six funds named “PureBeta.” These funds are broad-based, cap-weighted and priced to compete. At launch on Sept. 22, these funds were priced within 0.01% of their close competitors—mostly matching iShares Core and Vanguard funds, and just 0.01% more expensive than Charles Schwab’s offerings. That was before SSGA made its pricing announcement.
• This past week, Franklin Templeton launched a suite of 13 plain-vanilla single-country funds, two Europe-wide funds (hedged and un-hedged) and a hedged Japan fund, with expense ratios of 0.09% and 0.19%. This is a clear shot at iShares’ dominance in this space. The BlackRock direct competitors charge between 0.48% and 0.64%.
• Not to be outdone, Deutsche Bank repurposed two country/region ETFs and cut its fees to 0.15%, while also cutting fees to the same level on its Japan JPX-Nikkei 400 Equity ETF. 

Here’s how the landscape has changed over the past month. For starters, Vanguard and iShares now look overpriced in the 1000/2000/3000 space.

 

 

137 ETFs Charge 0.10% Or Less

The flows have already begun to follow suit in the 1000-tracking funds. IWB lost just about $600 million in October, while VONE lost $5.8 million. Meanwhile SPLG and SCHK took in $18 million and $102.8 million, respectively. Small-caps have yet to follow suit, perhaps because of liquidity concerns.

As of Oct. 31, 137 ETFs listed on U.S. exchanges carried annual expense ratios of 0.10% or less. These funds hold $1.34 trillion, or 41% of all U.S. ETF assets. Twenty-eight of these funds are now priced at 0.05% or less. That makes for tough competition in the dozen segments covered.

Let’s look at the eight segments where at least one of these nearly costless vanilla funds compete, setting aside the four value and growth segments, where differences in index construction drive the divergence in returns and make direct comparisons difficult. In these eight segments, competition is fierce.