ETF Fee War Winds Down as Active Funds Gain Market Share
- Active ETFs now make up more than half of all funds, according to Bloomberg.
- The market for passive, ultra-low fee ETFs has become saturated.
The rise of actively managed ETFs is bringing to an end the race to offer funds with the lowest fees.
Actively managed funds now make up more than half of all exchange-traded funds, the total more than doubling over the past five years, Bloomberg recently reported. For years, much of the competition in ETFs revolved around offering products with the lowest fees. In some cases, no fees were charged on new funds to undercut rivals and quickly grab market share.
That strategy is paying off less and less as the market for cheap, passively managed funds gets saturated. The world’s biggest ETFs—the $686.6 billion Vanguard S&P 500 ETF (VOO), the $611 billion SPDR S&P 500 ETF Trust (SPY) and the $575.3 billion iShares Core S&P 500 ETF (IVV), all follow the S&P 500 and charge expense ratios as low 0.03%. Together, the three issuers control nearly three-quarters of the entire U.S. ETF market.
As the market gets crowded, issuers are bringing to market more specialized, active funds. While typically smaller, they charge fees magnitudes of times higher to pay for expert oversight and in many cases experience massive trading volumes.
“Issuers haven’t stopped competing, they’ve just shifted focus,” Bloomberg Intelligence Analyst Athanasios Psarofagis wrote in a recent research note.
Passive vs. Active Funds
For years, fund issuers, inspired by The Vanguard Group’s model of cheap, passive investing, had focused on offering ETFs that track indexes and require relatively little oversight. The largest bond fund, the $129 billion Vanguard Total Bond Market ETF (BND) issued in 2007, tracks an index and charges 0.03%.
With Vanguard, BlackRock’s iShares and State Street’s SPDR controlling about 73% of the $11.2 trillion in U.S. ETF assets, smaller issuers are offering more niche products that allow them to charge higher fees for active management.
Many of them are experiencing wild success. The actively managed $6.5 billion Direxion Daily TSLA Bull 2X Shares (TSLL), charges 0.95%, more than 30 times VOO’s expense ratio. Launched barely three years ago, it’s regularly the busiest ETF, trading around 220 million shares a day, according to MarketWatch.
The era of super-cheap ETFs is closing, Psarofagis wrote, while noting that average fees for funds issued this year have climbed to a record 0.65%.
“What was once a race to the bottom on fees has become a race to the top in areas like yield and volatility,” he wrote.
