One reason the exchange traded fund business is growing so quickly is that the financial products appeal to many different types of investors. For example, traders like the ability to buy and sell ETFs during the day, while buy-and-hold investors are drawn to their low fees and indexed approach.
“Low dealing costs and the expectation of being able to buy or sell throughout the trading day at a known price more or less in line with the value of the underlying assets are the main attractions of ETFs for traders,” writes Pauline Skypala at the Financial Times. “Low charges on the funds themselves are an additional plus point.”
In the U.S., retail investors account for about 50% of the ETF market, according to estimates.
“That is big business, and U.S. providers are fighting for market share, using fees as the battleground,” Skypala reports.
BlackRock (NYSEArca: BLK) recently announced fee reductions at its ETFs and created the new iShares Core Series targeting long-term investors. Also, Charles Schwab (NYSE: SCHW) and Vanguard have slashed expense ratios at their ETF lineups.
BlackRock executives say there are several different distinct user groups of ETFs.
“First are active capital markets participants who need deep liquidity and derivative capabilities. Second are those who look to ETFs for precise specialized exposure. And third are those who are buy and hold investors and broad core exposures,” said BlackRock President Robert Kapito during the firm’s recent quarterly earnings call. [BlackRock ETF Fee Cuts Target Buy-and-Hold Investors]
The recent fee cuts are mostly about the largest firms battling for market share among long-term investors.
“It appears U.S. investors, at least, are taking the view that it is not worth paying for active managers to make decisions on which stocks to buy or sell and prefer just to own the market, especially when market access comes at such a low price,” the FT reports.
Meanwhile, traders are increasingly tapping ETFs to trade entire sectors rather than buying individual companies. [Traders Using ETFs in Place of Individual Stocks]