As the exchange traded fund industry continues to attract investment money, fund companies have pushed fees on passive, index-based strategies closer and closer to zero.

In an attempt to achieve scale and maintain market share, large ETF sponsors have slashed fees on a number of products, with big players like Vanguard Group, BlackRock’s iShares and Charles Schwab fighting in a perpetual ETF fee-war that has pushed expense ratios on some popular ETFs down to a 0.03%.

Last year, iShares reduced the fees on a number of its products, with the iShares Core S&P Total US Stock Market ETF (NYSEArca: ITOT) now showing an expense ratio of 0.03%. ITOT was the cheapest on the block for a brief moment.

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Not to be outdone, Charles Schwab lowered fees by one basis point on four of its large-cap ETFs in response to iShares, with the Schwab U.S. Large-Cap ETF (NYSEArca: SCHX) and Schwab U.S. Broad Market ETF (NYSEArca: SCHB) both coming in at a low 0.03% expense ratio.

“For traditional market-cap weighted index funds – the return of two funds covering the same market should be equivalent, resulting in beta being commoditized and fund managers left competing only for price,” writes Angana Jacob, Global Research & Design at S&P Dow Jones Indices, in a research note. “Thus, the entry barrier becomes the scale, and is no longer about the product. If a fund has USD 100 million AUM and the cost of replicating the market for an additional USD 100,000 is close to zero, in order to maximize profit, the eventual price target should also trend toward that point.”

Consequently, Jacob argued that as margins approach zero, larger firms might consider a so-called loss leader approach or waiving fees in an attempt to attract investors, retain accumulated assets and build scale in higher-priced products.

Related: ETF Industry Could Expand Almost Threefold by 2021

The sponsors have been able to slash the fees largely because of the rapid growth of the funds as the ETF industry has accumulated $2.3 trillion in assets under management.. Looking ahead, the industry may continue to find more opportunities to reduce fees as scale increases. According to a recent PwC survey, global ETF assets are likely heading to $8.2 trillion, with the U.S. portion going up to at least $6.2 trillion by 2021.

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