ETF Fee Wars Rage On

ETF Fee Wars Rage On

Across all asset classes, 2019 has seen the shift of assets to lower-cost funds.

Director of Research
Reviewed by: Elisabeth Kashner
Edited by: Elisabeth Kashner

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


The first half of 2019 marked a tiny shift in fund investment trends, with investors showing some willingness to try complex strategies.

For years, dollars have flowed to the cheapest, broadest and simplest household-name passive funds such as the iShares Core S&P 500 ETF (IVV). The trend rewarded low-cost providers that operate at enormous scale—mainly, BlackRock’s iShares Core suite, and Vanguard—and has threatened traditional active managers.

Active Competing With Zero

As investors streamlined their portfolios, fees trended toward zero, prompting many to ask if asset management would remain a viable business.

2019 seems to be going the same way so far, but with a twist. Active management is still losing assets to passives and fees continue to trend downward, but investors' preferences have become less monolithic.

Flows year-to-date have favored factors, ESG [environment, social and governance], and cash management funds. These complex funds charge marginally higher fees compared to their simple vanilla counterparts.

Pricing power has come under pressure as the fee wars have followed the flows. Asset managers that had pinned their hopes on upselling complexity are now caught in the fee wars they had hoped to avoid.

Paying More For Complexity … For Now

Between 2016 and 2018, fund inflows favored broad-based, cap-weighted equity ETFs with exposure to the S&P 500, developed markets and emerging markets. But in the first half of 2019, the list of the top five ETFs by flows changed. A low volatility fund displaced one of the S&P 500 funds and an intermediate-term bond fund replaced one of the developed market equity funds.


Top 5 ETFs In 1H 2019 (By Flows)

Source: FactSet


Renewed interest in bond funds is not surprising given the dramatic interest rate decrease we saw in the first six months of 2019. The breakthrough for USMV is an event. As shown in the flows chart below, after years of stability, USMV’s asset level turned upward starting in Q4 2018 and accelerated in 2019.


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



USMV’s fees, while low in the absolute sense, are five times higher than its major vanilla competitors and more than seven times higher than the cheapest fund in the U.S. total market segment.

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.

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.”

Elisabeth Kashner is FactSet's director of ETF research. She is responsible for the methodology powering FactSet's Analytics system, providing leadership in data quality, investment analysis and ETF classification. Kashner also serves as co-head of the San Francisco chapter of Women in ETFs.