This article was provided courtesy of ETFtrends.com.
It’s no secret that there is an exchange traded fund price war raging on, with top providers aiming to offer the best product at the lowest price. Conventional wisdom tells us that this can be beneficial to investors, but are there other implications that could surface?
“So, what are the effects of these price wars? They do reduce costs for some investors but there are land mines as well. In order for the ETF providers to cut fees they have to cut operational costs as well to run the funds more efficiently. Most ETFs by their nature are run efficiently so the cost cutting can hit in other areas,” Richard Keary wrote for Wealth Management.
Heavyweight providers are leading the charge in the recent war, with Vanguard, formerly the low price leader, finding close competition from Charles Schwab and BleackRock’s iShares. Fee reduction is just one aspect of attracting market share, but it can be the most important in that it can gain the initial attention of an investor. Low fees also maintain the market share, which is just as important as attracting it. [Read More: PowerShares Slashes Fees on Six ETFs]
However, when it comes to low expense ratios, there are a lot of factors at play other than cutting fees and pricing it right. Index tracking error is important because it can control the liquidity of an ETF. ETF liquidity is an important feature because an ill-liquid fund will not attract investors nor assets. Trading costs and brokerage fees are also part of the total cost package and must be considered. If an investor is trading frequently, trading costs can add up quickly, and cut into principle. Then a lowered expense ratio is offset by the high costs of moving in and out of the fund.