There are dozens of different exchange traded fund providers vying for the attention of investors. Furthermore, brokerage firms are trying to attract ETF trading by offering free trades for in-house brokerage accounts and other incentives. Ultimately, investors win from this competition.
“A client’s needs must be considered first, of course. For a client with a strong buy-and-hold philosophy, the ETF with the lowest expense ratio is often a wise choice. But in accounts where there is frequent trading or for a client who may need to liquidate assets on short notice, a few basis points of expense ratio may be overshadowed by transaction costs, spreads and liquidity,” Joseph Lisanti wrote for Financial Planning.
The ongoing ETF fee war is beneficial for investors. They are getting the best possible product at the lowest possible price. Fund managers are creating new products that undercut a similar product based upon fees. Others are turning to enhanced indexing strategies or commission-free trading platforms, reports Investopedia. Overall, the ongoing ETF fee war has shaved off about 75% in fees, according to the report. [Vanguard Dividend ETF Fee Cut: Popular Vanguard ETF Gets Even Cheaper]
Most advisors warn that low fees should not be the end-all, be-all when selecting an ETF. There are various points to consider such as taxable capital gains, decent liquidity, the bid-ask spread and tracking error. All of the above factors can essentially cancel out a lower expense ratio should the investor decide to sell. In general, however, if it comes down to a few ETFs to choose from, all else considered, the lower-fee ETF is going to be chosen.[Vanguard lowers Fees on Emerging Market ETFs, Other Funds]
“In short, the expense ratio can’t be examined in isolation. I’m going to use it as a consideration, but not the only consideration,” says Shelley Ferro, a financial planner, in the article.
Some of the highlights of the ongoing fee war include the cost-cutting competition between low price leader Vanguard and BlackRock’s iShares. Both providers are in competition to gather the most market share by lower prices, evidenced by Vanguard cutting costs on ETFs such as the Vanguard S&P 500 ETF (NYSEArca: VOO). Charles Schwab, a low-price ETF leader, launched a commission-free trading platform for investors. [Schwab Unveils Game-Changing Commission-Free ETF Platform]
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.