ETF Providers: Go Big or Go Home?

September 26th at 11:09am by John Spence

A fee war has erupted in the ETF business with some of the largest providers including BlackRock’s iShares, Vanguard and Charles Schwab lowering costs for investors.

The firms are cutting expense ratios in diversified ETFs that give investors exposure to wide swaths of the market. [Schwab Takes the Lead in ETF Price War]

Although liquidity and trading spreads are important, many investors and advisors focus mainly on cost when differentiating between broad index-based ETFs. [The Shifting ETF Landscape]

Most of the industry’s assets reside in these “plain-vanilla” ETFs hitched to popular benchmarks such as the S&P 500, Dow Jones Industrial Average and MSCI EAFE. Also, the so-called Big Three of iShares, State Street and Vanguard together account for nearly 90% of ETF market share.

However, many smaller ETF firms are carving out a niche for themselves by going in the opposite direction with specialized ETFs or funds that appeal to short-term traders. Additionally, some companies are trying to stand out by incorporating elements of active management into their ETFs rather than simply tracking indices.

Invesco PowerShares, Van Eck, ProShares, WisdomTree, Guggenheim, First Trust, Direxion, Global X, ETF Securities, U.S. Commodity Funds, FlexShares, IndexIQ, AdvisorShares, Emerging Global Shares, RevenueShares, Teucrium, FactorShares, Northern Trust, GreenHaven and Exchange Traded Concepts are among these second-tier firms battling for market share.

Although fees cuts are good news for investors, S&P Capital IQ ETF analyst Todd Rosenbluth thinks expenses should be just one factor to consider when selecting funds.

“We encourage you to look closely at the expense ratios of the ETF you are considering, but also other factors related to performance and risk,” he wrote in a note.

Schwab’s recent fee reductions are intended to help the firm gain market share with ETF investors looking for broad, diversified exposure to equities and fixed income.

“This move is unlikely to resonate with ETF investors that act more tactically, shifting from one sector or country to another based on macroeconomic and secular trends,” Rosenbluth said.

His outlook reflects the fact that ETF investors are a diverse group, including rapid-fire traders as well as long-term, buy-and-hold investors.

One attractive feature of the ETF structure is that short-term traders and long-term investors can peacefully coexist, unlike mutual funds. [Why Traders and Investors Can Coexist in ETFs]

“We have found that smaller providers … have tried to gather assets while targeting investors with a special focus,” Rosenbluth observed.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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