The adoption of exchange traded funds (ETF) by investors both large and small has been swift. Assets under management in the security type continue to swell and now sit above $2 trillion dollars. Globally, there are more than 4,766 different exchange traded products. However, with a multitude of similar funds tracking similar indexes such as the S&P 500, sponsoring firms have only one real differentiator to compete on- that's price.
Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.
Enter the ETF Fee War
With more than 209 different ETF providers looking to capture your investment dollars, the big boys have pulled out all the stops. That means sending many ETFs with already bargain basement expense ratios even lower and cutting deals with brokerage firms to offer more free trades for their products.
Whether you're a retail or institutional investor, the burgeoning ETF fee war and the trend of lowering expenses is a big win for your portfolio.
Lower and lower expenses have been with the ETF industry since the beginning when State Street Corporation (NYSE:STT) introduced its popular S&P 500 SPDR (ARCA:SPY) 20 years ago. However, the competition has only intensified over the last few years as ETF adoption has exploded.
Some fund sponsors have created "me too" products or those tracking indexes already available to investors by undercutting a popular incumbent product on fees. Other ETF providers have sought other ways of differentiating their products. This has included using other enhanced indexing strategies or as asking investors to look at other indirect costs - like trading volume - instead of just focusing on expense ratios. More recently, ETF issuers have partnered with brokerage platforms to offer commission-free trading of select funds.
The Biggest Hits
The biggest attacks in the fee war have come from Vanguard, BlackRock Inc.'s (NYSE:BLK) iShares unit and State Street. Both are competing to gather the most market share based upon which one can offer the lowest fees. The first real salvo fired by the fee came from Vanguard, when in 2011 it introduced its Vanguard S&P 500 ETF (ARCA:VOO). Expenses for the fund were just 0.06%. That was more than 3 basis points less than BlackRock's and State Street's competing S&P 500 funds. Since that time, Vanguard has lowered the fees on almost its entire line-up of ETFs.
Both State Street and BlackRock responded by lowering fees on their popular products as well. State Street began slicing fees for its nine popular U.S. equity sector SPDR ETFs - such as The Energy Select Sector SPDR (ARCA:XLE) - from 0.20 to 0.18%. BlackRock introduced its Core Suite of funds - which included lower expense ratios as well as new share classes of popular funds.
Not to be outdone, Charles Schwab Corporation (NYSE:SCHW) - who already has some of the lowest ETF expense ratios on the planet for its funds - introduced free trading of its ETFs for its customers. Then it took things further and reduced its expense ratios even more. The Schwab U.S. Broad Market ETF (ARCA:SCHB) now only costs 0.04% to own.
The Bottom Line
While the ETF issuers are busy killing each other with falling fees, the real winner in the price war is you, the investor. The downward pressure on fees has been nothing but positive for cost-conscious investors. The progress has managed to take about 75% worth of fees off of investors' bills since the SPY debuted 20 years ago. That's pretty impressive since many mutual funds have actually increased their expenses over that time via the birth of 12-b fees.
Overall, high fees are one of the main ways investor's underperform the market. The fee war has allowed them to own a variety of asset classes, virtually for free in some cases. At the end of the day, that benefits retail investors. Add in the fact that many investors can now dollar cost average into ETFs via free trading at certain brokerage accounts and you a have a recipe for long-term success.
At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.