A Deeper Look at the ETF Fee War

January 17th at 8:26am by Tom Lydon

The exchange traded fund price war has been ongoing over the past few years due to the sheer volume of competition. The battle is not going to fade away anytime soon, and investors will continue to benefit from this in 2013.

“Offering the lowest fees in a product category has been a strategy for several entrants, with some incumbents responding with price cuts. Still other ETF providers have introduced other strategies or sought other ways of differentiating their products, such as asking investors to look at other indirect costs of holding an ETF beyond simply a stated expense ratio. And in recent years, brokerage platforms have partnered with ETF issuers to offer commission-free trading of select ETFs,” Robert Goldsborough wrote for Morningstar. [Vanguard Cuts Fees on 22 ETFs]

In general, ETF fees are impacted by the rise and fall of assets under management, which are disclosed in Securities and Exchange Commission filings. For example, BlackRock iShares had 40 ETFs that rose a few basis points in cost simply due to a change in asset levels, reports Goldsborough. Likewise, Vanguard lowered the cost of 24 ETFs while raising fees on two, simply due to a change in asset levels. [Investors Like ETFs' Low Fees, Liquidity]

Here is a rundown of action in the ETF fee wars:

  1.  State Street SPDRs: The first manager to market with the SPDR S&P 500 ETF (NYSEArca: SPY) which cost 0.20% at inception. SPY cost 0.19% in 1995, 0.18% in 1996, and 0.17% in 1999. By 2004, its price tag was down to just 0.11%. The Select Sector SPDR ETFs first charged 0.57%. Within two years, those equity sector ETFs’ fees fell to 0.28%. By 2010, their price tags dropped to 0.20%. [Positive ETF Trends for 2013]
  2. BlackRock iShares: iShares’ “blanket” strategy, which today encompasses some 280 ETFs and the industry’s dominant market share, involved going virtually everywhere rather than simply competing on cost. Today, iShares ETF suite covers all asset classes, sectors, fixed-income and international areas of the market.
  3. Vanguard: The provider is known as the low-price pioneer. Originally noted as the low-cost provider of mutual funds, the ETF manager carved out the same reputation in the ETF business.
  4. Charles Schwab: Schwab set the bar for fee-free ETF trading with in-house brokerage accounts, and has offered ETFs at all time low expenses. For example, the Schwab US Broad Market ETF (NYSEArca: SCHB) costs 0.08%. [Total Stock Market ETFs]

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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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