The ETF fee war has forced some U.S. banks to adjust pricing strategies in ways that may erode profitability, Fitch said.
“This price competition is particularly relevant in the plain vanilla index space, which serves to replicate investment returns of bellwether indices such as the S&P 500 and Dow Jones Industrial Average, among others,” it added.
“Since the financial crisis, net outflows from actively managed funds into index products and ETFs have made it more difficult for managers of higher cost products to compete. The growth of ETFs, with low expenses and no restrictions on trading throughout the day, is posing a threat to actively managed funds in both the retail and institutional channels,” Fitch said.
“Furthermore, we think that a race to the bottom in fees for index funds and ETFs likely signals the growing importance of scale in the asset management business, with slow fee growth and lower margins discouraging market entry by competitors,” the ratings agency pointed out. “In a more mature industry, with consolidation largely complete, smaller competitors in the index fund and ETF space will find it increasingly difficult to challenge incumbents, while future price competition from the existing large incumbents is likely.”