The low fees that exchange traded funds charge are a major reason the industry has seen $154 billion in inflows. Meanwhile, mutual funds have lost $119 billion in outflows over the same time period.
The ongoing ETF price war has kept ETF industry fees low, as providers aim at grabbing the most market share. As the ETF fee war has intensified the result has been lowered costs for investors.
For example, the three largest ETFs that track the S&P 500 have super low expense ratios: SPDR S&P 500 (NYSEArca: SPY) 0.09%, iShares S&P 500 Index Fund (NYSEArca: IVV) 0.07% and the Vanguard S&P 500 ETF (NYSEArca: VOO) costs 0.05%. [SPDR S&P Marks Two Decades of ETF Growth]
“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. [A Closer Look at Three S&P 500 ETFs]
Most traditional mutual funds are run by a professional manager. Even if the mutual fund does not outperform, the manager does have to get paid, and this is part of the expense that mutual funds incur.
“Because mutual funds charge much higher fees than ETFs (on average about 1.4% of assets), the funds need to do better than the ETFs just to match their performance after fees. If an ETF with an expense ratio of 0.1% returns 8% per year before fees than a mutual fund with an expense ratio of 1.4% must return 9.3% before fees just to match the ETF’s performance,” Timothy Green wrote for The Motley Fool. [ETF Fee War Ups Competition in Fund Industry: Fitch]
The biggest problem with mutual funds charging such high fees is that over time, they cut into returns. Investors have become much more cost-conscious as it has become difficult to earn income in this low yield market. Protecting principal is more important than ever. Investing in a broad-based ETF is an efficient way to gain exposure to the entire stock market at a reasonable cost. [ETF Fee War: Investors Win]
Tisha Guerrero contributed to this article.