A lot has been made recently of price competition in the ETF industry, with stories of falling expense ratios fueling a recurring theme of an all-out fee war.

While some firms might be trumpeting their offerings of loss-leader products or a small subset of low-cost ETFs, a closer look at recent industry-wide expense ratio data indicates that presumptions of ever-declining expense ratios among ETFs may be more hope than reality.

In fact, the focus on declining expense ratios has obscured a pretty consistent trend in charges that ETF investors have paid.

According to data from Morningstar, Inc., 83% of ETFs’ actual fees, in basis points, as reported in their annual reports, stayed the same or increased during the 2011-2012 period, while 17% experienced a decrease.

As shown in the charts below, the proportions were almost identical in the 2010-2011 period. It’s hard to see how these numbers reflect a price war.

Source: Morningstar Inc.
*Includes all ETFs that have 2011–2012 annual report expense ratios available.
**Includes all ETFs that have 2010–2011 annual report expense ratios available.

The truth is, as ETF and mutual fund assets grow, economies of scale generally help to reduce expense ratios. I say “generally” because while Vanguard’s structure—we are owned by our funds and, in turn, collectively owned by the fund shareholders—encourages us to pass along these economies of scale to our shareholders, other companies may not be so incentivized.

Correspondingly, as assets of a fund decline, expenses are spread across a smaller base, potentially causing its expense ratio to increase if other operating costs don’t change.

In the midst of a so-called ETF price war, you may think all fees are falling. When the fog clears, the reality may be quite different. For now, this is a battle fought on very narrow ground by a few combatants. Or, if this were an Orwellian ETF Animal Farm, someone changed the rules. It’s not that all ETFs are equal; it’s that all ETFs are equal but some ETFs are more equal than others in terms of reducing costs for their investors.

Joel M. Dickson, Ph.D., is a senior investment strategist and a principal in Vanguard Investment Strategy Group.