As exchange traded fund providers launch more complex and alternative strategies, the industry’s average fees are rising. Nevertheless, the majority of assets are in low-cost, beta indexing funds, which have also seen expenses slashed in the ongoing “fee war.”
In the year ended June 2013, the average expense ratio of ETFs increased to 0.62% from 0.61%, writes Rick Ferri for Forbes.
The rise in average fees is attributed to the growing number of alternative ETF strategies, including “enhanced” indexing methodologies and niche asset classes. These cost more to fun, compared to traditional market-capitalization weighted indices. Moreover, the actively managed ETF space is just beginning to grow, and active strategies tend to have higher costs.
The number of alternative index ETF strategies have grown over the past couple of years after the land grab for traditional index strategies. According to Morningstar data, the average net expense ratio of newly issued funds since 2010 is 0.70%.
While alternative strategies may be interesting, investors are still steering toward low-cost, broad index options. According to Vanguard, 74% of new asset flowed into the lowest expense quartile funds in between 2003 and 2012. [‘Fee War’ Could Hit Specialty, Niche ETFs Next]