Birds may fly south for the winter, but exchange-traded fund (ETF) fees have been heading south for the last eight years, according to a J.P. Morgan report. Even smart beta ETFs have been dropping their fees as the fund space becomes more competitive in a quest to capture market share and investor capital.
Moreover, it’s not a certain asset class that’s experiencing this unprecedented drop in fees–it’s all across the board. Investor preferences for these low-cost options has certainly spurred this movement to bargain base expense ratios.
“This lower fee trend has been driven both by investor flows gravitating towards lower fee funds within each region and asset class and the move by ETF issuers to selectively cut the expense ratio on a number of funds,” wrote J.P. Morgan Global Quantitative and Derivatives Strategists, Marko Kolanovic and Bram Kaplan.
According to report, asset managers like Vanguard have been cutting fees for their various ETF products. For Vanguard in particular, it slashed fees across 21 of its largest ETFs–all with around $660 billion under management. As a result of these price cuts, it will save investors in the region of $88 million in fees per year.
Is the strategy working with a bevy of fresh investor capital? Apparently so as investors are scooping up the funds with the lowest fees.
“Funds in the lowest quintile by expense ratio, or those with an expense ratio of less than or equal to 24 bps, attracted around 80% of all net inflows to U.S. ETFs over the past five years,” the report noted.
When it comes to specific trends in asset classes, equities have seen the largest drop in fees compared to fixed income and as such, they’ve seen the most investor inflows. Actively-managed funds have seen less of a drop compares to passive funds, but they’ve also followed the trend to lower costs.
“Almost all of the decline in AUM-weighted fees for actively managed funds came over the past year and most of this decline is due to investor flows into lower fee actively managed funds, rather than expense ratio cuts by the funds themselves,” wrote Kolanovic and Kaplan.
This latest data follows suit with investor behavioral trends thus far this year. In 2019, investors are looking to play more defense against volatility, but at the same time, don’t want to do so at the expense of higher costs.
Of course, with a plethora of options available, especially in the exchange-traded fund (ETF) space, where are the opportunities given the current market landscape? Can an investor really build a defensive portfolio at a low premium?
Click here to read the full report.
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