Jack Bogle Led This Investing Fee War

January 31, 2019

Market Share Shifts Reflect Lower Cost ETFs

This same story played out in segment after segment, asset class after asset class, across all investment strategies. Dollars flowed to cheap funds, while expensive ones lost out. This resulted in a shift in market share from costly funds to cheap ones.

The stakes got higher—actually, lower—this year. On an asset-weighted basis, the bar for cheapness dropped during the course of 2018. Nowhere is this more obvious than in the alternatives asset class.

Back in 2017, alternatives ETFs that gained market share cost an asset-weighted average of 0.86%, while the losers cost 0.92%. Over 2018, investors flocked to alternatives funds costing, on average, 0.79%; market share losers’ expense ratios averaged 0.86%. Price tags that attracted assets in 2017 became undesirable in 2018.

The fee war hit the bread-and-butter asset classes just as hard. Equity ETF market share winners’ price tags fell to an average of 0.16% in 2018, down 0.01% from 2017. Equity ETF market share losers’ costs dropped 0.01%, as well, to 0.23%. An equity fund with a 0.20% price tag could be considered midrange in 2017, but was more on the edge in 2018.

The table below illustrates how the fee war played out across asset classes in 2018. 


Asset-Weighted Expense Ratios For Funds That Gained/Lost Market Share, By Asset Class & Year


In the largest segments—those with assets of $100 billion or more—the price war was fiercer still, with market share winners costing 0.11% and losers 0.19%, on an asset-weighted average basis. Funds that closed up shop for good cost 0.33%.

That bears repeating. In a space where actively managed mutual funds routinely charged 1.00% or 1.25% a decade ago, ETFs that charge 0.20% are now uncompetitive.

A More Expensive Mousetrap?

Not long ago, in 2014 and 2015, ETF issuers, having written off “cheap beta” as unprofitable, expected to maintain pricing power by offering complex strategies that were “smarter” than the vanilla funds. They turned out to be half right.

While the complex strategies have caught on with some investors and do carry higher expense ratios, the price war is as active among complex funds as it is among the simple ones.

Two examples—one set of value funds, and one set of money market substitutes—will make the point.

In 2018, the Vanguard Value ETF (VTV) overtook the iShares Russell 1000 Value ETF (IWD) as the largest U.S. value ETF thanks to its $8.5 billion of inflows in 2018. VTV’s price tag is now 0.05%, down from 0.06% in 2017. IWD costs 0.20% per year. That’s no longer an attractive price point.

Similarly, the cash equivalent segment saw J.P. Morgan displace its long-established, twice-as-expensive PIMCO competitor. All funds in this segment are actively managed, with median fees at 0.30%. The JP Morgan Ultra-Short Income ETF (JPST) costs about half that, 0.18%. In 2018, JPST took in $5 billion in flows, beating out the segment leader PIMCO Enhanced Short Maturity Active ETF (MINT).

Strategic VTV and active JPST are emblematic of their strategy types, as illustrated in the table below. Strategic, so-called smart beta funds that increased their market share dropped from 0.29% to 0.21% over the past year, while active funds that increased their market share now cost 0.85% on average, 0.04% less than they did in 2017.


Fee Compression In US Equity Funds, By Investment Strategy Group


These complex funds are heading toward zero, albeit from a higher starting point.

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